Q2 2022 Nu Holdings Ltd Earnings Call
Good evening, ladies and gentlemen, welcome to New Holdings conference call to discuss the results for the second quarter 2022.
My presentation accompanies todays webcast, which is available in news investors relations website at www dot investors not new in English and Portuguese.
This conference is being recorded and a replay can also be accessed on the company's IR website.
This call is also available in Portuguese to extra sick you can press the icon on the lower right side have you seen screen and then choose to enter the Portuguese are at.
So like mute original audio.
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Please be advised that all participants will be in listen only mode. You may submit only questions at any time today using the Q&A box on the webcast.
I would now like to turn the call over to Mr. George Friedman.
Buster Relations officer, a new holdings.
You May proceed.
Thank you very much operator would evening, everyone and thank you for joining our earnings call today.
If you have not seen our earnings release, a copy is posted and the results Center section of our Investor Relations website.
With me on today's call are <unk> Atlas, Our father, Chief Executive Officer, and Chairman Youssef Flores, our President and Chief operating Officer, and Guillermo Lago, Our Chief Financial Officer.
Additionally, Jack <unk>, our chief product officer will join us for the Q&A session of the call.
Throughout this conference call the company will be presenting non <unk> financial information, including adjusted net income.
These are important financial measures for the company, but are not financial measures as defined by FRS.
Reconciliations of the company's no iff's financial information to the <unk> financial information are available in our earnings press release.
Unless noted otherwise all growth rates are on a year over year and FX neutral basis.
I would also like to remind everyone that today's discussion might include forward looking statements, which are not guarantees of future performance and therefore, you should not put undue reliance on them.
These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations.
Please refer to the forward looking statements disclosure in the company's earnings press release.
Today are our founder and CEO , Doug <unk> will discuss the main highlights of our second quarter 2022 results and some of the opportunities ahead.
So the sequence Lee <unk>, our CFO and use of Flores, our president and COO, who will take you through our financial performance for the quarter.
After which time, we will be happy to take your questions.
I would now like to turn the call over to Debbie does he please go ahead. Thank you.
Thank you <unk> Hello, everyone. Thank you for being with us today.
Happy to announce that we had another very strong quarter, combining growth efficiency and significant progress towards building the largest digital finance platform has lots of America.
On the customer acquisition front, we attracted on our $5 7 million customers, reaching more than 65 million customers at the end of the quarter.
This growth continues to be primarily fueled by organic channels with very low customer acquisition costs.
Notably or monthly activity rate improved even further to 80% a new historical high Mark where customers now accounts for 36% of the adult population of Brazil.
The growing number of active customers, coupled with a continuous maturation forward earlier cohorts, resulting new historical highs of purchase volume credit portfolio and revenue.
Or purchase volumes reached $20 billion up 94% year on year.
We became the number four cars player in Brazil, this quarter, surpassing century old incumbent institutions.
And we continue to gain market share acquired up to a quarter.
Our consumer credit portfolio grew significantly above market at 107% year on year to a total of $9 1 billion.
While maintaining very strong unit economics.
Our credit portfolio remains concentrated in credit cards and unsecured personal loans, we haven't really been started or journey into secured credit products.
Over revenue more than tripled year on year to about $1 $2 billion. This quarter, driven by both product upsell and cross sell in resulting in a historical high average revenue per active customer.
Artwork.
Well, we have discussed our ecosystem in the past in today's presentation, we wanted to spend a bit more time, highlighting the significant progress. We have made to date in cross sell a key piece of our strategy.
Going from a mono product to a multi product platform and from a mono country to a multi country platform, while improving profitability as we scale.
First moving from a more of a product to a multi product platform.
We started in 2013 with a strategy of building the future of financial services in Latin America with a credit card so our first product.
We chose credit card as you address the Marshalls from remaining Brazil had very attractive unit economics and enabled us to start building the credit underwriting capabilities from day one.
We were very successful in using credit cards to build a large customer base and one of the strongest consumer brands seem to reach.
In about nine years, we became one of the largest credit card issuers and one of the top 10, most loved brands in Brazil, and we continue to expand its core product at a very significant pace.
It remains one of the highest credit cards in the Brazilian market, we're already generating hundreds of millions of re IC and earnings which we then are able to use to finance the growth of new verticals.
Most fintech globally have had a very hard time going from being a successful morning lighter.
To then being able to build a multi product platform and.
And here is where we think <unk> is a significant exception and haven't been able to successfully introduce products across many verticals in financial services.
Our second product or savings account you contact has now surpassed or first product credit cards and to date cost with over 45 million active customers.
Despite exceptional levels of engagement on deposit growth.
<unk> has allowed us to become one of the largest payment platforms in Brazil today with around 23% of all the fixed transactions in the country pass through our pipes.
<unk> has also allowed us to develop our unique deposit franchise today, our retail deposits exceed our interest earning portfolio by more than four X. We do not need to rely on portfolio securitization or wholesale funding, we own our own destiny with respect to funding a rare feat FERC consumer fintech.
Or third product personal loans currently has four medium customers and is generating meaningful earnings for our business.
Here, our growth bottleneck, so around willingness to underwrite credit and enabled this feature for our customers.
As we tend to go slowly and conservatively with any credit product.
Our gross bottleneck certainly not distribution.
As of April 2022, or almost 59 million Brazilian customers accounted for approximately 32% of the entire personal loans market in Brazil. So we do not need to go outside of our existing ecosystem.
Into approximately one third of the Brazilian consumer finance industry.
Our fourth product or savings account for small and medium enterprises has brought us access to the SME segments was profit pool is estimated at approximately 25% of the consumer profitable.
In less than three years and with a particular focus on microchip and small enterprises, we became one of the top five SME players in Brazil.
In terms of number of active customers with 12% market share of corporate checking accounts in Brazil.
As of the end of this first quarter, we had 2 million SME customers.
Wondered 50% year on year.
Beyond these core foot products, we launched insurance last year, where our first product you'll vida a life insurance product became the fastest growing insurance product in the history of Brazil.
Today <unk> has over 700000 policies and maintains the highest net promoter score of the sector.
Dan we entered investment space through the acquisition of the largest independent direct to consumer platform in Brazil, easy invest rebranded new invest which was a key part in allowing us to reach now over 5 million active customers in our investment business already likely the market leader in the Latin American direct to consumer investment space.
And even more recently, we announced that we reached more than 1 million customers creep the product in the crypto three weeks after launching it to our entire customer base.
So in just a few years, we were able to go from a credit card model liner to achieving leadership positions in the verticals, we enter deposit accounts personal loans Sme's life insurance and investments, while reaching over one third of the population in Brazil.
These to us represents significant progress in advancing our product diversification and cross sale strategy.
Second moving from a mono country to a multi country platform.
On the international expansion front, we reached $2 7 million customers in Mexico.
Consolidating our position as the number one issue of new cars in this country.
Colombia, we grew our customer base to over 300000 customers and have received over $1 5 million applications to date, demonstrating a combination of the significant pent up demand as well as the productivity, we're having in this country.
Likely we are the number one credit card issuer in Colombia as well by now.
All of these was achieved while sustaining our net promoter score in the Ninety's and high levels of customer gravity in both geographies.
It's worth highlighting that one week ago, New Columbia received approval for its requested licensed established Madison company in the country.
With this approval, we now have banking licenses in the three countries, we operate Chris posting an important barrier to entry and enabling us in the future to intermediate financial products and offer deposit products to our customers.
Together, Mexico, and Colombia are largely the size of Brazil in terms of both GDP and population. We're excited with the prospects of these two countries and confident that they can be as relevant to us in the future as Brazil has begun.
Finally, all of this growth has required tremendous investment and we realize that it might be hard for investors to assess whether all of these growth is profitable.
Therefore, we thought it would be useful to share a few kpis of our operations in Brazil, our core market, which we do a year for the first stock.
In the first half of 2022, new Brazil generated on accounting profit of $13 million up from a loss of $19 7 million in the full year 2021, while continuing to provision significantly sort of so to the continued fast growth.
Credit portfolios as well as expensing large investments of new products and features just crypto top PE investments fixed financing et cetera.
Our core products credit cards personal loans in the quarter are by now very profitable and therefore, we're able to reinvest all of those profits into the expansion and improvement of our operations.
And even with all of that investment, Brazil is now profitable and <unk>.
Generates profit, which we now expect to reinvest into the growth of Mexico and Colombia.
We acknowledged investors increasing focus on the importance of profitability.
And while we continue to make our decisions based on long term value creation, we're not disconnected from our investors and the need to sanity check the profitability of the entire model as we invest for the future.
The current context of macro volatility reinforces our focus on cost diligence on different fronts.
<unk> contributed not only for us to achieve our goal of becoming the lowest cost manufacturer in newer markets, but also shorten the path to very high profitability.
And with that I'll turn the call to our CFO <unk> <unk>, who will discuss the operating transport of second quarter.
Go ahead Glen.
Thank you Ravi.
Now before moving on to the quarterly results, let's recap, our simple yet powerful value generating formula.
Drawing our customer base across Brazil, Mexico, and Colombia, and turning customers into active customers.
Second expanding the average revenue per active customer or our pack through both product upsell and product cross sell and.
And third delivering oldest growth while maintaining one of the lowest cost operating platforms in the industry through best in class cost to acquire to serve off risk and our funding.
Now, let's take a deep dive into the quarterly results of our business.
We added $5 7 million customers during the second quarter in line with the net adds of the first quarter and mainly through organic channels.
This brought total customers to $65 3 million by quarter, and a 57% year on year increase making is likely the fifth largest financial institution in Brazil in terms of number of customers. We are also pleased with Mexico, and Colombia continued to grow at faster rates compared to <unk>.
Brazil, and having contributed together with over 700000 unique customers additions this quarter.
Importantly, we continue to drive customer acquisition, while increasing the monthly activity rates to 80% up from 72% a year ago and 78% in the prior quarter.
That marked the 19th consecutive quarter of higher monthly activity.
Testament to our ability to continue to grow our ecosystem, while driving customer engagement.
Now moving to an analysis of our customer cohorts.
Three charts show, how increasing engagement of our customer base and a higher number of products per active customer continue to drive up our pack.
When looking at the <unk> and the chart on the far right. One can see that why we reached a monthly <unk> of $7 $8 in the quarter mature cohorts are already at $21. One can also see that all cohorts maintained healthy growth trends.
This combination of higher engagement and more products per customer has proven powerful in terms of customer monetization. Arctic expansion has helped few are triple digit revenue growth.
We also saw another quarter of exceptional revenue growth.
230% year on year on an FX neutral basis, reaching a record high quarterly revenue of nearly $1 $2 billion.
This growth is the result of the compounding effects in two areas.
A growing number of monthly active customers not only customers, but monthly active customers.
Higher levels of product upsell and product cross sell which continued to expand our monthly opex.
Although our monthly art Peck has expanded as strongly over the past quarters as you can see in the left hand side. We believe we are very far from our potential there.
<unk> of incumbent banks, our SKU far above ours at $40, notwithstanding our art Peck potential it's important to note that with the advantages in our cost pillars, we can afford to serve customers with lower Opex and SKU post very healthy unit economics.
Moving on to the progress of our cards business.
<unk> volume increased to $20 billion up 94% year on year on an FX neutral basis. Again. This is the result of more product up sell cross sell and the continued engagement of our customers.
The slide on the right hand side shows how purchase volumes drove with the month duration of the cohorts.
In the second quarter as Doug mentioned, we estimate that we became the number four cards player in Brazil continued to surpass its some of the most traditional income in financial institutions in the country.
In our consumer finance portfolio composed of credit cards and personal loans, we continue to grow at a healthy pace on an FX neutral basis, albeit slower than prior quarters.
The lower level of growth stems, mostly from personal loans.
This quarter, we decided to reprice and moderate the growth of our personal loan portfolio aimed at strengthening its credit to resilience in the context of a more uncertain short term outlook for the Brazilian economy.
I also make two observations to contextualize this trend.
First FX negatively impacted our balance seekers, if we adjust the portfolio figures on an FX neutral basis, our portfolio would have grown by around $300 million in personal loans and over $1 billion in credit cards.
Secondly origin nations in personal loans remained largely unchanged in FX constant terms quarter over quarter.
In the context of a short duration portfolio similar origination levels yields lower growth rates simply because part of the originated volume replenishes the amortization in the periods.
Let's now look into two things in more details one the evolution of our credit card interest, earning portfolio and to devolution of our personal loan origination.
With regards to the evolution of our credit card interest, earning assets in Brazil, or IEP, it's important to contextualize that we have been consistently expanding our credit car IEP, mainly as a result of launching new features that allow our customers to use their credit.
Cards S. Finance means. This features include the ability to finance banks lips individual purchase in two installments and peaks transfers in all cases using credit card limits.
As you can appreciate IEP horizon from installments, including those arising from this new financing features have outpaced the growth of IP from revolving.
And they are skew way below the industry average this has been a change in behavior, we have incentivized rather than a change in behavior suggests and credit degradation.
Finally, it's worth highlighting that this IEP figures capture the entirety of our credit card asset class.
We do not comingle iep's of credit cards and personal loans.
If you are late and credit card you are ineligible for a personal loan.
Yeah.
Now moving to the originations of our personal loans.
The graph in business slide shows the evolution of our personal loan origination along with the respective monthly interest with charge on them.
One can note two things in the second quarter of 2022.
First we continue to reprice or personal loan origination aimed at increasing our credit our resilience and offsetting the impact of higher interest rates.
Second our originations for our personal loan book remained largely stable on an FX neutral basis.
Going forward the pace of origination in personal loans will hinge on the short term outlook of the Brazilian economy, and the credit performance of our cohorts.
As of today, we are assuming for the third and fourth quarter of this year levels authors nation similar to that of the second quarter on an FX neutral basis.
We continue to advance on our strategy of building a robust local currency deposit franchise, which we use to fund most of our operations.
We ended the quarter with a loan to deposit ratio of only 24%.
Deposits continue to grow at a fast pace during the second quarter up 87% year on year on an FX neutral basis with an average funding cost below CDI, Brazil risk free rates.
We added nearly $700 million in deposits over the last three months closing the quarter with a total deposit balance of $13 3 billion.
On a quarterly effects neutral basis deposits would have grown $1 9 billion quarter over quarter.
In addition, we recently introduced changes on the yield remuneration for short term deposits within the new accounts.
At the same time, we launch with all of our features in our ecosystem such as the money box, which we expect will help optimize our deposit franchise Foster cross sell and up sell off our investment platform and mitigate potential attrition.
This changes combined can contribute to a reduction in our cost of funding overtime.
Since with touch again on the topic of costs and this is why we remind you that one of the key competitive advantages of our platform rastus on its very low cost to serve.
This quarter, our average monthly cost to serve with AIDS.
Remaining below one dollar.
While our monthly <unk> reached seven $8 I remind you that our cost to serve continues to be 85% lower than those of traditional banks.
Going forward, we expect our cost to serve to remain at the dollar level.
Moving down the P&L, we delivered another quarter of record high gross profit up 109% year on year on an FX neutral basis to $364 million.
Note that our gross profit margin has decreased in the quarter as a result of the following factors as discussed in our prior earnings call.
First growth driving credit loss provisioning.
<unk>, we have to front load the recognition of our credit loss provisioning when never alone is booked.
So the faster we grow our credit book the more short term pressure he brings to our gross profit margin.
Second interest on cash balance as interest rates go up we earn more money on our large pool of cash balance even if it's partially or fully offset by higher funding expenses in other words higher rates drives our revenues up believe our gross profit larger.
<unk> unchanged this pushes down our gross profit margin as it increases the denominator of the gross profit formula.
As our credit portfolio matures and interest rates stabilize the gross profit margin is expected to converge to those of the more mature cohorts.
Operating leverage is a key component in our platform and can be observed in two fronts.
First 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 the chart on the left hand side.
Second as our overall revenue levels increase with further dilute our low cost operating platform and improve our efficiency levels as can be seen on the chart on the right hand side.
We expect both trends to continue and compound over time, allowing the company to achieve high Nims and best in class efficiency ratios.
Moving on to the bottom line, our recurring profitability confirms again that we are on the right path with our earnings Formula.
We reported adjusted net income of $17 million.
To sum up this section it is important to emphasize that despite our undeniable growth orientation.
We'll never leave behind our cost discipline as we believe that the long term winners in the Latin American financial services industry will be the lowest cost manufacturers. So we aimed at being the lowest cost manufacturer.
The four cost pillars of retail bank.
Cost to acquire cost to serve cost of risk and cost of funding.
I would like to highlights two important operating trends that exemplify our cost discipline.
First we expect as lower personnel growth in the second half of the year after advancing on the staffing of our new geographies during the first half of 2022.
Second we expect a reduction in our cost of funding over the coming quarters as a result of the change to the new account remuneration.
Now I would like to turn the call over to use us our president and Chief operating Officer, who will walk you through our asset quality performance and credit underwriting approach.
Thank you Laura.
Let me now walk you through a few key indicators that track the asset quality and overall health of our credit portfolio in the second quarter of 2022.
As a reminder, we make underwriting decisions to optimize the return resilience and payback of our credit originations.
Let me start by reinforcing to key features of our credit business.
First we underwrite mostly unsecured credit through credit cards and personal loans.
These products are expected to have higher loss rates and shorter durations have been secured credit products and they are priced accordingly.
We seek to optimize return for the amount of risk, we take not minimize risk.
Second as Robert mentioned, we have taking management actions to reprice, our products and bolster the resilience of our credit underwriting as.
As a result, we expect risk adjusted margins of 50% to 60%.
These actions have resulted in even more resilient portfolios.
These charts illustrate the unit economics of each of our core credit products.
Credit cards and personal loans those.
Those expressed as an annualized percentage of receivables.
On the left hand side, you can see the unit economics of our credit card product.
Revenues consist of noninterest and interest revenues, which together amount to 27%.
It doesn't unexpected losses of 11% we ended up with a net lending margin of 16%.
This results in a post tax return on assets of around 7% and an ROE in excess of 80%.
On the right hand side, you have the unit economics of our personal loan product.
The interest revenue yield is about 58% annualized with a cost of funds of approximately 11%.
The expected annualized losses for the portfolio or about 22%, yielding an operating margin of 25%.
This resulted in a return on assets of about 14% and return on equity in excess of 120%.
Not only are the returns of these products are attractive, but the resilience is also strong we can both withstand more than a doubling of losses and still be profitable.
Of course in the business of taking credit risk and always with an eye on earning commensurate returns and always ensuring the resilience of those returns in the face of uncertainty.
With this let's now turn our attention to asset quality trends.
Overall, leading indicators, namely NPL 15 to 90 have remained stable and asset quality has followed its post pandemic normalization course as discussed in prior calls.
Now before I discuss the specific trends, let me make a few observations on the metrics themselves.
First it is important to note that the NPL 90, plus is both a lagged metrics and also more of a stock and implemented given the assets continue to accumulate in the bucket until right up.
Hence to get a sense for the latest trends in credit performance, we find early delinquency metrics.
15% return on the line to be more informative in.
In the appendix of the presentation, we provided an illustration of how the slab and the stock versus flow dynamics resulted in different behaviors of 90, plus delinquency ratios compared to 15% to 90 ratios.
Second in Q2 of 2022, we made a change in the write off methodology for personal loans to better alignment with recovery expectations as per <unk> guidelines.
This resulted in anticipating write offs for nonperforming personal loans from 360 days to 120 days of delinquency.
This change has two distinct impact on NPL metrics.
First it reduces nonplus NPL ratios by virtue of eliminating 121% to 360 day delinquent loans from both the numerator and denominator of that calculation.
Second it increases NPL 15 to 90 as it reduces the denominator of that ratio.
The charts on this slide incorporate these changes as if they had been implemented since the fourth quarter of 2017 for ease of comparability across the whole country.
For credit cards right on timing has remained unchanged at 360 days.
And for both products, we apply a partial write off methodology, which means that only the expected recovery part of written off loans is kept on balance sheet under stage three.
Lastly.
I want to emphasize that this change does not affect the P&L or income statement. As these write offs had already been fully provisioned for under occupancy on methodology.
Let us now turn to the actual NPL trends.
NPL 15 to 90 is a leading indicator is showing a stable picture, suggesting that the post COVID-19 normalization cycle may have run its course.
90, plus NPL ratio increased from three 5% to four 1% in line with our expectations.
The normalization cycle is still working its way through the 90 plus ratio as the delinquency inventories continue to FERC later stage buckets.
Our baseline expectation for the rest of 2022 is that our early delinquency ratio of 15% will remain largely stable absent any substantial changes in either of our underwriting strategy or the environment.
As 90, plus is a lagging indicator and more of a stockman of flow metric. When we can take more time for it to stabilize so we expect it to continue to rise over the coming quarters.
However, under <unk> nine this expected mechanical increase in 90 plus rates does not represent a P&L over as we had already provisioned for the expected delinquency flow throughs under RPC on methodologies.
Provide more information about this in the following slides.
Let me recap the impact of expected credit loss or ECL as a loan loss provisioning methodology has on the consumer finance business with high growth rates as is the case for noon.
For <unk> nine loan loss provisions must be recognized when the loan is granted.
Even before any revenue associated with that loan is accrued.
This results in an intentional timing mismatch between revenues and costs.
For this reason the higher our consumer credit brokerage the more provisions we have to book upfront.
And as long as we mentioned earlier this negatively impact gross profit and gross profit margins during periods of high growth.
And as growth rates normalize vertical gross profit margins are expected to converge over time those are mature cohorts.
With that context, let us now turn our attention to NPL provision formation in the quarter and its drivers.
Our provision balance grew by $129 million on an FX neutral basis or 15% quarter after quarter after taking into consideration the change in write off methodology.
Excluding the impact of the change in write off of <unk>.
Around 85% of the provision bill in the quarter or $207 million was driven by the growth of the portfolio, the remainder 15% or about $39 million.
Was driven by resources.
In the context of INR nine and given the short duration of our portfolio risk add on provisions tend to be far more sensitive to changes in 15 to 90 delinquency rather than the 90 plus delinquency rates.
And as discussed earlier early delinquency are leading indicator has remained largely stable.
In summary, the growth of our portfolio has remained the dominant driver of provision changes.
To wrap up I want to reinforce that we are confident in our credit strategy. Both in terms of our ability to underwrite and our ability to price adequately for risk.
Our models are continuously enhanced and our credit framework is designed to be resilient to the ups and downs of macro cycles.
Haven't shared that data and perspectives on credit and asset quality, Let me now turn the call back to our founder and CEO Dennis for his concluding remarks.
So to summarize our performance in the second quarter illustrated the distinctive strengths of our platform, which we believe provides a unique combination of exceptional growth with compelling unit economics and operating in one of the largest and most profitable banking markets globally.
First exceptional growth or customer base grew to over 65 million customers and nearly 60% growth driven by organic channels.
Most of the active customer base grew even more reaching 52 million customers, a 75% year on year growth.
Mexico, Colombia already moving the needle they have contributed with over 700000 customers. This quarter and we believe we have already become the number one insurer of new credit Carson book markets.
Our ARPA grew to $7 $8.
105% year on year, FX neutral growth driven by continuous product cross sell and up sell.
Our purchase volume grew to $20 billion or 94% year on year, FX neutral growth, making us already the fourth largest player in Brazil.
Revenue grew to $1 $2 billion into quarter, 230% year on year, FX neutral growth driven by both customer ads and <unk> expansion.
It is hard to find a company that is compounding these level of growth at our scale.
Second compelling unit economics, we believe we have become the lowest cost manufacturer of our industry combining best in class cost to acquire Costa sharp cost of risk and cost of funding.
While or are more than double over the past year or cost of sharp remained flat in the same period exceeding the very high operating leverage potential of our platform.
Our core consumer finance products credit cards personal loans.
Above industry average profitability with ROE in excess of 80% and 120% respectively.
Even in this more uncertain environment proving the robust levels of credit resilience.
Our core market, Brazil generated positive earnings, which is expected to compound over time allow us to continue to invest into new products and geographies. It is hard to find a fintech of our scale with such a compelling profitability structure.
We're very proud of what we 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'll now start the Q&A session for investors and analysts.
I wish to ask a question. Please press <unk> raise your hand.
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Please limit yourself to one question and a follow up.
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You may submit only questions at any time today using the Q&A box on the webcast.
Thank you operator.
Collecting questions and our first question comes from the line of Jorge <unk> from Morgan Stanley would you. Please open his mind. Thank you.
Hi, everyone. Congrats on the great.
Great results.
Could I ask you about the growth in the portfolio.
Made some.
Comments about.
The slowdown, particularly in personal loans being driven by.
The environment that you're seeing in Brazil now.
Maybe if we can but just double click on that.
In the Brazil, it's actually growing more than what consensus is expected the economy will probably grow almost one 5% unemployment is now at a seven year low the consumers getting more handouts from the government.
<unk>.
And your early delinquency kind of like points too.
A.
Risk on scenario, if you will I mean, theres evidently not nothing that's going wrong with the portfolio, probably maybe because they are slowing down but given that your personal loans, particularly are in early stages of growth where the cross sell of <unk>. Your total clients or credit card clients is still small it is a bit.
Surprising in the context of everything that I said that the slowdown in a solar sharp versus the previous quarter.
I am looking at the FX neutral numbers and according to my calculations on a quarter over quarter basis.
Both really slowed down basically it was cut in half and.
So just wondering if you can provide a little more color on all of US. Thank you and again congrats on the numbers.
Alright. Thank you so much for the question look I would start by no referring you to slide 35 of the earnings deck, because you will know that.
Tier a portion of the decrease in the velocity of our growth in our credit book actually stems from the FX devaluation. If you look at our portfolio growth on an FX neutral basis.
You'll see that the growth remains quite.
Quite healthy.
See that our credit portfolio and on an FX neutral basis from about $7 9 billion to $9 2 billion.
Now we are certainly no cautious.
About the environment now been cautious does not mean stopping to grow.
In the second quarter, we grew personal loans originations by about 7% quarter on quarter on an FX neutral basis and almost two five times year on year also on an FX neutral basis. So.
So we believe we are remaining drawing.
Paces that are materially higher than the market. The second thing is that the growth in personal loans and the growth in credit card use.
Is by no means constrained by demand like our customers account for about one third of the consumer point has performed in the country. The growth is also not constrained by product.
We believe that our credit card and personal loan products have the best NPS in the markets and some of the best conversion ratios in the market.
It is also not constrained by capital and liquidity we have.
Plenty of capital and liquidity available in our balance sheet. So it is only constrained by our credit underwriting appetite, which is 100% under our control and we have chosen to be slightly more selective in the second quarter, but we've chosen to actually be also repricing our products more aggressively as you may note.
<unk>.
In the presentation that we have shared with you.
Going forward, we do expect that we will remain to grow at levels that are much higher than the average growth pace of the market, but we will continue to be quite selective and conservative as we have been over the past 7% to eight years.
I would say that irrespective of a potential decrease in the velocity of growth in the second quarter. We continued to grow our customer base very aggressively our customer base already accounts for about <unk>.
No 35, 36% of the entire <unk> population of Brazil. It accounts for about one third of the entire consumer finance pool in Brazil. So we have plenty of room to cross sell in the future when the market grew.
<unk> itself.
Thanks for that that was very clear and if I may follow up sure.
On.
The point you made about increasing rates for the personal loans business, which is slide.
Slide 16 of the presentation with an average rate of four.
6% in this quarter up from 4%.
How much of this is <unk>.
Mark to market of the increasing funding cost and how much it is.
Is it actually going to increase in net.
NII of the product.
Hi.
More has been done in the third quarter. So we should expect sort of like the NII of the protocol.
Go up over time.
Yes, so just a small correction, it's five 6% in the in the second quarter, but I think the growth in pricing that we did in the second quarter of the year.
More than offsets the increase in funding cost and should and should therefore helped.
Help us expand our risk adjusted margin I.
I think for the first time, we are providing.
The disclosure if you take a look on slide 20 of the expansion of the of our net interest margin. So notwithstanding a scenario in which interest rates are going up we have proven that we can put to work are very large and low cost deposit base and actually expand by taking our net interest margin from <unk>.
Five 2% to almost 10% we expect this trend to continue and compound over time.
Not only as we lower our cost of funding, but also as we increase our interest earning portfolio IEP and therefore increase the carry of our positions.
Thank you Michael Thanks again.
And our next question comes from the line of <unk> <unk> from UBS Greater could you open the line. Thank you.
Hi, guys. Thanks for the opportunity very good top line not so good quality.
I have a question on desktop quality.
Trying to understand why new has changed it did write offs methodology for personal loans. This quarter. If there's any strong motivation to do this right now.
Thiago this is usage. Thank you for the question so.
Things.
The.
Write off methodology change first of all it is.
It has nothing to do with asset quality in the quarter.
It is.
Basically us following <unk> nine guidelines, so <unk> nine doesn't specify exactly the timing of write off for a particular asset classic type alone. However, it provides that.
You must write off.
Alone when there is no more reasonable expectation of partial or full recovery.
Net asset so when we started the personal loan business a couple of years ago, we didn't have any <unk>.
Actual experience with recovery rates, so as a default we started with write offs timing that was similar to credit cards I E 360 days.
Now two years later, we actually have.
Actual recovery rate data.
B.
Our write up methodology on and declined 120 days is the more appropriate reflection.
Of the <unk> guideline the other thing to note.
Writing personal loans at 120 days is generally.
Best practice, amongst syntex and financial institutions globally.
And.
We are following that practice now.
I mentioned early it's also important to know that.
These write offs and ability to changes.
No bearing whatsoever on our P&L or income statement, because the assets written off had been already fully provisioned for in earlier periods.
No very clear and just one very small follow up.
If I'm not wrong you mentioned during the call that you guys are expecting a more stable asset quality going forward.
These are the right message.
What do you guys are expecting for the English ratio going forward.
Yes.
I think it's as I said earlier, it's important to distinguish two things one is lead indicators of asset quality, which is.
You can look at 15% to 90 delinquency rates.
As we disclosed those have been stable now for a couple of quarters.
This suggests that the so called.
Normalization to pre pandemic risk levels may have run its course, when you look at early delinquency indicators now.
In contrast, when you look at 90, plus Npls, that's a lagging metric and that metric is still in the process of catching up to what early delinquencies are showing so I expect that that just mechanically will continue.
Two to rise for the next couple of quarters as it catches up to what early delinquencies have already reached.
No very clear thanks, a lot.
And our next question comes from the line of Martin <unk> from Bank of America could you open his line. Please operator.
Hi, guys. Good afternoon, Thanks for taking my question.
The question on deposits right. You showed that you continue to grow your deposit base and a healthy pace.
We saw a meaningful slowdown I think it grows about $3 billion in the previous quarter and this quarter was less than $1 billion.
At the same time you change the remuneration of your deposits. So I was wondering.
Has that impacted your ability to grow your deposit base clearly, we do see the benefits of lower funding costs, but do you have any data that you can share with us what has been your the impact on your ability to grow your deposit base since you've changed the remuneration of the accounts.
Sure.
Thanks for your question. So I think if you if you youre, probably referring to slide 17, and if you take a look at this slide.
The.
Decrease in the velocity of our deposits from 12, 6% to $13 3 billion.
Stems, mostly from the FX devaluation in the in the quarter on a quarterly FX neutral basis. So same effects deposits would have grown $1 $9 billion quarter over quarter. Two it would have grown largely at the same pace as the prior quarter. So just wanted to flag that.
The FX devaluation plays a role in the way that we present those numbers.
So that's one thing the second thing is that no I think the <unk>.
<unk> to the new remuneration.
Remuneration to which you alluded.
Has not no.
Had any impact so far in the velocity with which we are we continue to accumulate deposits. We have no done the rollout of the new content remuneration for a relatively small portion of our customer base and we are doing no massive AB testing.
We have not observed.
Today any difference in any of the relevant kpis, including the amount of deposits, including engagement, including NPS. We will continue to monitor this very closely going forward and the speed at which we roll it out to the entire base will largely depend on those on those on those observations, but so far.
We are quite encouraged by what we have seen.
I think one good morning.
Yes, sorry.
Wanted to add very quickly on on the deposit product one thing thats important to consider is.
These west.
Project that we worked on over a year that has a goal to ultimately create a better deposit product at lower cost.
And pardon me of the challenge was to redesign the product so that customers could have access to.
Our investments product that have higher than 100% CDI.
As we got to integrate a new investment products and so will it be mainly what we're looking for is we should see an increase in deposit flow at a lower cost that's at least our goal that deposit product today is much better than two months ago as customers have access to a number of different functionalities and so well.
Mainly we're it's very early days, we're still trying to monitor basically daily all those different metrics.
But but but if things play out that's what we're ultimately going.
Okay, No that's clear and then let me ask a follow up question right.
Has been asked already about the NPL.
Your risk appetite.
Diminishing the growth of personal loans.
But I was wondering if you're making any adjustments on your credit cards are you reducing credit card limits.
Is there anything that youre doing clearly you're seeing even though you showed the npls are fairly stable you think it's more prudent to be a little bit more cautious on personal loans.
We're also going to be a little more cautious on credit cards are you seeing anything that worries you on the credit card book.
Yes.
To address the question on <unk>.
Our current stance in both credit cards and personal loans I would say were consistent across both.
Reducing credit card limits.
At the moment.
What we're doing is we're adding a little bit more on the side of building resilience.
If you look at the unit economics.
Chart for both credit cards and personal loans in the.
In the earnings presentation, that's basically what we're targeting at the moment in terms of.
Returns ROA Roe margins and resilience.
So it's resulting in growth that is.
And it has not increased as much if you will.
Compared to prior time periods, but is.
Absolute levels of growth that are fairly stable about $5 billion.
In personal loans, we've added in the quarter, which has been consistent with the prior couple of quarters.
And about 5 million new customers, which is also consistent with prior time periods. So we're basically taking a.
A slightly more cautious approach in terms of resilience, but not really taking any drastic approach, we're not seeing any worrisome signs and if you look at the delinquency metrics we went over.
Anything we showed signs of stability in the in the early delinquency metrics. So.
More of.
An abundance of caution given the uncertainty in the environment and looking forward.
Daily based on anything more than that we've seen in the data so far.
Okay. Thank you very much.
And the next question comes from the line of Ashwin <unk> from Citi.
Hello.
And congratulations from me as well.
My first question is.
Obviously, youre frontloading loan loss provisions as required right.
Early delinquency indicators show stimuli.
Stability as you pointed out in the 15 90 range.
And while the mathematical impact and generates the NPL 90 presses.
Is there to see.
I was trying to think ahead. If you were to see continued stability in delinquency indicators could you provide a framework for how to think of gross margins heading into next year.
Eschmann.
It's a good question.
We believe in general even though we don't guide for next year or into next year.
There are two things.
Fact, largely our gross profit margin.
Number one is the velocity at which we grow our credit portfolio number two is interest rates moves as interest rates go up.
Somehow increases the both the.
The numerator and the denominator of the Formula and therefore decreases the gross profit margin. If you take a look at our cohorts basis, the unit economics to which Youssef pointed out we believe that once both of those things Steve.
Stabilize we should get to gross profit margins around 60% <unk>.
But I am not saying that this is something that we will obtain in 2023 or 'twenty. Four is basically that is the steady state gross profit margin of our mature cohort.
Understood.
Thank you for that and just staying on the topic of scaling and then looking at the various operating expense lines.
Should be look at G&A as the primary source of operating leverage and our debt opportunities in customer support and ops using automation and other techniques.
And I imagine you probably wanted to continue increase marketing and robust pace.
Yes.
That's a great question and I think for the first time, we are providing one metric that we track very closely with the new bank with the evolution of our efficiency ratio with and without share based compensation I would draw your attention to slide number 20, you can see that since no.
At the beginning of last year, we have driven our efficiency ratios from.
About 90% to 58%. If you include share based compensation or from about 70% to 50%. If you exclude share based compensation we.
We believe we are only at the beginning of the journey to get more efficiency from where those efficiency will come from I think it will largely come from two places first our cost to serve is expected to remain flat at the dollar level, whereas our average revenue per active customers is expected to continue to expand.
As we have seen in the prior quarters and secondly, our G&A will grow at materially lower pace than the growth that we will have in our gross profit and our revenues in fact, if you take a look and you know.
Dissect, our G&A youre going to see that between 50 and 60% of our G&A is driven by of our head count.
And the velocity, which we are going to grill head count over the course of the next two years should be materially lower than the velocity at which we grew head count over the past few years that should also be fairly relevant boost to operating leverage going forward.
Alright. Thank.
Thank you.
And our next question comes from detailed are barred from Goldman Sachs could you. Please open his line. Thank you.
Hi, Good evening, everyone. Thank you for the call I'm, taking my question also my question is on the revenue side.
So very healthy.
Opex trends.
Looking at it.
Chart on page 11 more.
A more mature cohort.
Around that $20 level.
Although it does seem to maybe beginning to peak do you think for the more mature cohorts, there's still more upside on that our pack and then thinking overall on that chart it looks like.
And about another 30 months a lot of your cohorts will be close to that $20 is that a fair way to think of it that.
Maybe three years or so a lot of your cohorts should be close to 20 or even higher.
Yeah.
Peter.
We don't think that our mature cohorts.
Have bottled within there is a skew quite a lot of room for them to continue to expand.
If you take a look at both what drives our expansion of our back two things drive the expansion of our bank.
Product cross sell and product upsell.
And if you take a look we are driving both upsell and cross sell up quarter after quarter, including in our more mature cohorts. The more mature cohorts that you see on slide 11, the show primarily the penetration of credit cards and new content.
The penetration of no personal loans investments insurance.
And.
Large number of additional products that we will launch has not.
Not even close to where we think it will be so there's a lot of cross sell and up sells due to come just to give you know an order of magnitude the our pack of incumbent banks. The <unk> of the retail operations of incumbent banks is estimated to be at $40 four zero.
We don't expect that we will get $40 because a substantial amount of those are petkoff incumbent banks comes from no fees that we will not charge, but there is still plenty of GAAP for us to close between our current average of seven eight and the $40 of incumbent banks.
Great that's very good.
Thank you and in terms of the.
Sort of total cohorts is take another three years, a reasonable assumption for for Windows kind of begin to mature and get to the same level as your current mature cohorts.
I think in general we expect to see the maturation of our cohorts to happen.
Slightly faster off net of our older cohorts simply because if you were a customer of new today.
You join an ecosystem with no plenty of products that you didn't have this you had joined new five years ago. So the ability for you to consume more products. There is much higher and greater today than it was 345 years ago, and therefore, the speed with which the monetization happens over the next two years.
Should be slightly faster than the speed with which we saw over the past three years.
No that's great. That's very clear. Thank you and can you say the same thing I guess about the primary banking accounts that around 55% keep an ear cohorts getting there much faster with that.
The upside as you introduce these additional products as well.
I think the upside no primary banking relationship we do expect that he will continue to go up.
I personally believe however that the upside from product cross sell and up sell.
Is even more pronounced than our getting marginally more primary banking relationship even though both trends should continue to grow and compound.
Okay, that's great. Thanks, a lot level.
Yeah.
And our next question comes from the line of Neil I'll.
Gorilla.
HSBC. Thank you.
Hi, congratulations on the reserve and thank you so much for taking my question.
Thank you for the additional disclosures that thing with Hartford.
Thank you, Chad Richie surety and Theyre not fixed under the previous record of looking.
And that they see that the NPL ratio was up 70 basis points quarter over quarter, our search product mix explains about 60 basis points.
There seems to be some worsening in terms of asset quality.
Is that one of the reasons why it kind of.
Being more conservative and cautious in terms of asset quality, if we keep the previous mythology.
Most of the deterioration in line with what you had anticipated.
Rob.
Hello, Daniel.
You mentioned that.
The change in methodology is more in line with the other <unk>.
No.
What do you see the others players in Brazil.
Pardon me Q2 based on a low priority.
So then what does what do you think would be the average for the system. If you want to compare numbers with that purpose system.
What would be the right way to do it. Thank you.
Thanks for the question. So let me try to address your questions in turn.
So in terms of the trend in the quarter on quarter movement in the Npls you are correct in that if you look at 90 plus under the previous write off methodology, which we've provided in the appendix section.
There was an increase.
Of about 120 basis points nominally and it would have been.
Around 60 basis points.
Constant product mix scenario.
The reality is.
Think you were alluding to.
That's.
Pretty much expected if you look at the left part of that slide you will get 15% to 19.
In the.
A quarter ago that metric actually went up by a similar amount of 110 basis points.
Nominally.
Around 80 basis points mix adjusted so basically within the 90 plus movement reflects this quarter.
The mechanical impact of.
What already happened in the quarter or so ago and 15% to 90. So it's not unexpected by any stretch of the imagination. You were also asking about.
Right up methodology and how it compares to other players in Brazil.
I can't personally comment on any specific.
Methodology.
Other <unk> or Fintech and Brazil, I think there are some players that I knew although Brazilian GAAP rules, which is distinct from ifr nine the regime that we follow.
Some of them have 360 day write offs, but you have to put that in the context of the kind of.
Our portfolio is that they run that generally tend to be longer maturities more secured.
Not necessarily an apples to apples comparison.
Perfect.
If I can follow up on the credit card receivables.
Posted on <unk> Gov.
Hi, actually showed a slight.
Like should we expect that to continue.
Rising further I should we expect some sort of a stable a D day.
And I think you mentioned previously that this is mostly being incentivized extending by you.
And you are not seeing any lessening in terms of people not being.
More people being late indicated got payments could you confirm.
Thank you.
Yes, I think you were referring to slide number 15 in which we showed the interest earning per fall off.
Our credit card against the market and yes, I think.
Both of your assertions are correct, we have increased our interest earning portfolio over the past four or five quarters.
Mostly as a result of actions that we have taken and things that we have incentivized more specifically the launching of new financing products and new financing features with our credit cards. You can basically finance specific purchase you can finance <unk>, which are called no banks leads you can now also finance peaks transactions.
So we have been adding those features that allow our customers to basically finance a greater number of Dr transactions enhanced foster the increase in IEP now even even by doing so we have two quite behind the average of the Brazilian market. We started I believe.
A year ago been about 50% of the market and now we are around 60% of the market, we expect to continue going up.
We don't guide then it's very hard for us to be more precise on if and when we're going to catch up with the market. What do we do expect this to go up.
Over the course of the coming years, not necessarily coming quarters, but coming coming years to your second question, which is.
Is the increase in IEP.
A sign of credit degradation.
Our observation given the <unk> testing that we have done and we've done a few control groups.
No is that most of the increase in IEP comes from our launch of new financing products on necessarily as a signal of overall credit degradation in our books.
Perfect. Thank you so much.
Yeah.
And our next question comes from the line of Glassdoor Osman from BTG Pactual.
Hi, everyone can you hear me.
Yes.
Hi, Hi, guys. So congrats on the numbers my question here is this.
Just trying to think about your potential future profitability rate you showed two variant.
Interesting graphs in the presentation that shows the potential or do you expect that roe's for your credit card and personal credit at around $80 to 120%.
When we look to <unk> results right naturally it was very different from <unk> right, but it always perceived as the premium retail bank in Brazil.
Take it down.
The retail into wholesale units.
The retail units.
<unk> is used to deliver 30% ROE in the past.
Then that went down to 20 and now it's at 16% because it has been suffering.
Let's say from from higher provisions.
So just trying to think about here is do you think.
Trying to look to that metric, it's a good one not necessary the 16%, but trying to look you know how much hub lets say, a leading kind of a retail bank is delivering.
And retail is a good metric for us to follow I know that you mentioned that you are park is going to be smaller than than the than the big banks, but youre going to be more efficient as well. So just trying to sort of thing here about how you think about the business in that comparison.
Thank you for the question.
Look it's very hard for us too.
Provide you with a specific number of reference however, I would discourage.
You from eventually anchoring the profitability of our business and the profitability of an incumbent bank.
However, well runs as incumbent bank maybe.
We just believe that we have been with additional banking redefining a new category in which.
We will have a completely different cost base of an incumbent bank and also a completely different.
Revenue stream, often incoming bank to a large extent of course, we still believe that we will have no consumer finances, our core but if you take a look at our forecast pillars cost to acquire cost to serve cost of risk and cost of funding and.
And we see the examples of other digital banks around the globe.
Have also started with consumer credit they have been able to obtain levels of profitability and returns materially higher than those of incumbent banks and the markets in which they operate.
Even in markets that have substantially lower means than Brazil. So.
No.
I wouldn't necessarily compare our target profitability with those of our local and become a bank and of course, we will we will try to gain the game or windows game on the cost base. We believe that the winners in the long in the long term in Latin America will be the lowest cost producers.
And we will we want to be as Debbie mentioned, the lowest cost manufacturer in the banking industry in Latin America.
Hi, Eduardo W. Here, just just to add one point here.
For Lagos answer.
The way, we think about our balance sheet and our capital is.
At scale has been a generally small balance sheet that dedicated capital to extremely high return on equity operations and so when there are financial products that we think are below a certain narrow thresholds, we rather be distributor that a manufacturer. So for example, we have some <unk>.
Partnership we have a partnership with <unk>, where we do.
Secured lending and.
So just because you are at any per item for home. It does have situations, we rather become a distributor that maintains at high ROE on capital versus being a manufacturer of ourselves, which is different I think that the model that a lot of the banks in Brazil follow where are you in that row for retail that you look you see our weighted average of a number of different retail businesses that have different types of Roe.
So I think it's important to mention that we want to continue to maintain our strategy of capital efficiency, where we'll be very disciplined on how that capital gets allocated and have the possibility to be both a distributor as well as a manufacturer.
Oh, great. Thanks, Thanks, a lot and good luck.
And our next question comes from Jamie Friedman from <unk>.
Hi, Thank you for the opportunity.
<unk> in Europe .
Answered too.
I think Ti those previous question on slide 11.
I think you inferred that the.
Number of products per active customer is in euro opinion more important than the primary banking account.
Ankur.
I'm just curious why you view it that way and if you view it that way and if you didn't say that I apologize, but if you do why you think that's the way to look at it.
Jamie I think from where I was come in is if you take a look at the product penetration that we have across our customer base.
You largely see that.
We have I want to say about slightly more than 60% of our customers with credit card slightly more than 80% of our customers with bank account.
About 5% of our customers with personal loans.
We have no uneven smaller portion of our customers.
Crypto with marketplace.
With insurance so the potential that we have to claim what we call to be our fair market share in each of the product verticals with what the rate is largely going to bring.
Really no bigger gap and value creation.
Then eventually our ability to take the primary banking relationship from 55 to 65 that is what we want to that as more of a magnitude that I wanted to convey.
However.
There is in fact a very.
Very strong correlation between you being a primary banking customer.
Customer and the ability that we have to cross sell more and more products to you. So I'm not saying the primary banking relationship customers is not a fairly critical kpis.
More drawn into the material product penetration that we still have to acquire across each of the verticals that we already have not to mention the new verticals that we will be launching in the coming quarters and years.
Okay.
That makes sense and iPhone now and then.
Also I think in your prepared remarks, you said.
And I may have written this down around that similar levels of origination lead to slower growth.
<unk> because of replenishing the amortized loans.
I was just wondering if you if that's right if you could be more explicit about what you meant there is do you mean the growth in percentage terms.
Yes, the growth in percentage terms and I would draw your attention to slide 35, which basically shows.
The evolution of our.
Of our credit portfolio on an FX neutral basis.
And the underlying pieces there is the our credit portfolio has a very low duration the weighted average life of our personal loan business.
<unk> is about six to seven months.
So there is a.
Volume that we need to originate every month just to replenish the personal loan that has been repaid or prepaid every month that is what I.
When I made that remark.
Makes sense. Thank you very much.
And our next question comes from the line of Jeff rate Elliot from autonomous.
Alright, thanks, very much for taking the question.
You touched on the benefits to funding costs from the change in deposit pricing that you announced can you elaborate a little bit on that.
How significant do you think the benefit can be.
It's very hard for us too.
To provide any indication we are in the very early days of deploying this.
<unk>.
We have deployed this to about 575, 6% of our customer base as of today.
We will probably have to track this over the course of the next coming quarters to be able to provide with a more.
Well grounded estimate for you.
Thanks, and if you just took that change and.
Assume that with no change.
Changes in customer behavior, so customers didn't use the money box option for example.
Can you give us a sense without changes in customer behavior, what the impact would have been if you had to use this new pricing say in the second quarter. Thank you.
We don't have.
That information job.
We believe that it's very hard for us not to foster a change in customer behavior with the money box in fact, we already seen.
Customers using money box quite extensively even for the relatively small number of customers that we have today in our <unk>.
<unk>.
We believe that we mentioned that it will be perceived by customers as being an all.
Columbo of offering that it even stronger and more compelling than the one that we had before we will offer on one hand, moneybox through which you can have access to investments that will have targets above 100% of CDI on the other hand, you have kind of your new Quant account that will yield 100% of CDI for the money that you leave there for more.
30 days.
The combination will ideally be perceived by customers is much stronger than what we have today, so really hard for us too.
Two to come up with an estimate at this point in time as to what is going to be the decrease in funding. We do expect to see a decrease in funding cost the magnitude of which remains quite uncertain, we will come back to the market with.
Our observations over the coming quarters.
Thank you.
And our next question comes from the line of select sender Mark Graf from Keybanc.
Hey, guys. Thanks for taking the question I wanted to first follow up on the question around portfolio growth just curious what.
<unk>.
What you need to see to kind of remove some of the caution that you've recently introduced in the underwriting practice.
Hi, there on the macro front or customer specific just what would cause you to read it removes some of that caution that's been introduced.
So I would say this.
Several things.
<unk>.
Good.
And we're looking at day in and day out.
One category of things is certainly the performance.
Of our cohorts in terms of.
Returns in terms of delinquencies.
Some of the metrics you see in the earnings presentation, but I would say there is also a qualitative considerations in terms of how much uncertainty, we havent new environment going forward.
Both on the sort of macroeconomic, but also political landscape and so forth and so.
It's hard to give you a sort of formula.
We see X Y and Z then we will step on the gas more and if we don't we will step on the gas less so it's a little bit of a preponderance of evidence that we're looking at both backward looking and forward looking.
Okay. That's helpful. And then just one question around the activity rate.
Just curious how you all think about the upper bound of this metrics. There's obviously, that's really nice progress and imagine that continues as is.
Customers take on more products, just kind of curious.
What you see as kind of the upper bound of that metric.
Hi, there. This is this is Jay fugal cheekbone concert Nu.
I think there are a few things to say about that.
As <unk> mentioned during some of his remarks.
We see great momentum in customer adoption.
We don't see that plateauing in the short term and we have newer cohorts that are adopting at a much at a much faster rate.
Okay.
At the same time, we have.
Really focused over the last couple.
Couple of years on building the infrastructure.
To allow us to launch products.
Greater velocity so in each one we launched.
Several high potential products to extend our franchise Divvied mentioned cook to investing we launched a credit card product for us because you want those are small medium enterprises, we launched mobile phone and this insurance, we launched new base or buy now pay later products and fixed rails, we launched the money boxes, which which lateral and debated talked about.
We expect that positive momentum to continue so we're not at the point, where there is a fixed number of products for customers.
Customers are new to continue to adopt and then we run out we're continuing to expand that frontier of new products and so even as customers adopt the products. We've already launched we're going to continue to push that out. So we see a lot of potential and momentum as we continue to deepen.
<unk> spoke in his opening remarks about the success we've had in four new verticals. The two new countries that we've been launching over the last two to three years. We are now we now working very hard on deepening the number of insurance products the breadth of investment products the number of lending products.
The full suite of small and medium enterprise products and taking all of that across the three countries. We operate so that frontier.
We know we can push out.
Even as the products we've already launched in the last three years are still in very early stages of their adoption. So theres a lot there.
Room to run here.
And we're sort of working on both fronts. The adoption of what we've launched and the continuing acceleration of launches over the next 612 18 months.
Great that makes sense I appreciate the thoughts thanks al.
And our last question comes from <unk> <unk> from <unk>.
Yes.
Hey, guys. Thank you for taking my question.
I wanted to ask by user growth, obviously, an impressive number again this quarter with $5 7 million added and in Brazil, you said, 36% of the adult population. So I'm, just wondering where your incremental users, especially in Brazil, where you're getting quite saturated coming from how much success, you're seeing in the cohorts that maybe you have not a grasp.
Before maybe you can talk a little bit about your success in penetrating kind of older more ethylene co products and where do you go from here to sustain this kind of user growth.
Sure. So thank you for your question. So we did.
Where would you like to think about the addressable market for Brazil, specifically is starting with the addressable market for the most part.
<unk>, our financial services product that exists in the content, which is payments so that release pics and <unk> pixies developing we effectively see in a few years everybody from let's say 780 or sold to 90, plus will have and that will.
Is smartphone using pix and that will take that probably means is that addressable market of something like 170 million Brazilians that will be connected with the smartphone paint for us really everything paint people paint businesses and.
I really interrupt part of their life. So we have 45 million active new contests, and the addressable market there is $170 million and by the way a lot of times customers don't necessarily only have one app they might have two or three so you actually end up seeing something like 600 or $700 million.
Accounts, which means there's still a lot of growth ahead, even for us in Brazil, we have disproportionate market share on picks were focus on usability on transaction Ality on really providing the best user experience has allowed us to gain a very significant market share in patient that continues to grow.
<unk>.
Part of that also to some previous question is what explains the increasing activity rates that youre seeing around increases day also explains increasing primary bank account. So all of these metrics end up being very much correlated with each other.
And so we think we could literally double or even more or customer base in Brazil, starting with our payments product and that means that it is the first product eventually.
We really diversify our present entire financial services space.
So it's still a very large addressable market to grow into that is Brazil.
And really Mexico, Colombia, we're in the early stages and while we've said we are hyper focused on these three countries over the next few years over a longer period of time, we might go beyond so from a customer perspective still a lot of growth.
Got it got it thank you and actually wanted to follow up on <unk>.
My other question.
There were some headlines that recently that ahead of the central bank kind of making a.
Predictions that picks will eventually lead to.
Elimination of credit cards.
Sure Thats, a long ago in the future, but was curious to hear your guys' thoughts on that sort of competitive.
Competitive dynamic between picks and your card business, how you see that evolving and how much of a threat do you see that hard-bitten.
Yeah. So we very much agree actually with that with that statement, that's something we've been saying for a long time, even compared the physical credit card to Netflix ending physical Dvds to People's host homes.
And eventually immigration towards a full streaming that's effectively digital payments.
In Brazil, So we think that's true.
Started our strategy too.
Use payments and a number of different.
Payment rails like pics to start diversifying away from credit card. So you why do you see for example in some of the some of the products that we have at the NPL.
Through a company we bought <unk>.
Now, enabling a number of merchants to pay <unk> or pigs checkouts.
And then we announced this quarter credit on top of fix. So eventually this is becoming an alternative to their credit card rails.
We think that there might be some potential cannibalization of first broadly debit that eventually credits, but the addressable market size increases significantly. So ultimately we are happy to cannibalize ourselves we're happy to.
Skate to where the puck is going and we think that ultimately a lot of it is digital payments.
But it is probably going to take a number of years to get there just specifically on credit card credit card itself has order visibility like international payments like payments in installments that peak still hasnt really enabled so we worked with a number of different scenarios, but we absolutely think that the park.
He is going into that direction.
Got it thank you very much.
Thank you.
The Q&A session is now closed.
I'd like to turn the call over to Mr. Jeff Friedman and New holdings.
Okay.
I appreciate the participation of all of you and you've had any questions that were not responded.
We'll be following up with you offline. Thank you once again and hope to hear from all of us.
Thank you.
The new holidays conference call has now concluded. Thank you for attending today's presentation you may now disconnect.