Q1 2023 Nu Holdings Ltd Earnings Call
Speaker 1: in Portuguese, click on the icon in the globe to enter the date of your Zoom and the selection option in Portuguese Room to access new style of audio original. Please be advised that all participants will be in listen-only mode. You may submit online questions at any time.
Speaker 2: operator and thank you all for joining our earnings call today. If you have not seen our earnings release, a copy is posted in the results center section of our investor relations website. With me on today's call are Talis Elis, our founder, chief executive officer and chairman.
Speaker 2: Youssef Lares, our President and Chief Operating Officer, and Guillermo Lago, our Chief Financial Officer. Additionally, Jackie Tugel, our Chief Product Officer, will join us for the Q&A session of the call. Throughout this conference call, we will be presenting known IFRS financial information, including adjusted net income.
Speaker 2: These are important financial measures for the company, but are not financial measures as defined by IFRS. Reconciliations of the company's 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-per-year effects neutral basis.
Speaker 2: 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 defer maturity from the company's expectations.
Speaker 2: Please refer to the fourth looking statement disclosure in the company's earnings press release. Today, our founder, chairman, and CEO , Laviveles, will discuss the main highlights of our first quarter 2023 results and provide an overview of our Brazilian operations.
Speaker 2: subsequently Guilherme Lago our CFO and Yusef Laroche 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.
Speaker 3: Thank you, Jorg. Good evening, everyone, and thank you for being with us today.
Speaker 3: Once again, in a quarter marked by general concerns about economic activity and asset quality in the markets we operate, the soundness of effectively all of our financial indicators remain very strong, attesting to the resilience of our business model and the execution of our team.
Speaker 3: So I will show in the next few slides we continue to deliver a rare combination of strong growth and increasing profitability through the ups and downs of our market.
Speaker 3: In the first quarter, our numbers continued to demonstrate the compounded effect of our platform's high growth, combined with the increasing profitability provided by our business model. Revenue surpassed $1.6 billion, expanding 87% year-over-year. Our gross profit reached $651 million, 124% year-over-year.
Speaker 3: or 145% quarter-over-quarter growth rate versus last quarter's PSA-adjusted net income.
Speaker 3: Adjusting net income reached $182.4 million, an increase of 60% quarter of reform.
Speaker 3: Meanwhile, we also continue to expand our customer base at a strong clip, ending the quarter with 79.1 million clients. NetApp worked very strong in Brazil where we welcomed 4.4 million customers during the quarter. Our activity levels remain robust at 82% even as we add more and more customers.
Speaker 3: demonstrating the intense engagement capacity of our platform. This slide offers a high-level overview of our recent financial performance trends.
Speaker 3: Highlighting our ability to increase revenue while expanding profits.
Speaker 3: Over the past two years, NU was able to double the number of customers from 37 million in early 2021 to more than 79 million at the end of the first quarter of 2023 and already surpassed 80 million customers by April .
Speaker 3: The strong growth of our customer base, associated with the rise in cross-sale and up-sale implied by the high engagement of our platform, resulted in our quarterly revenues multiplying by almost 7x in only two years, a triple-digit revenue-tegger over this period. The next chart of this slide illustrates our resilient underwriting capabilities.
Speaker 3: Quarterly gross profit, defined by total revenues deducted by funding costs, transactional expenses, and credit loss allowances, increased by more than 5x in the period, with gross profit margins expanding accordingly, even though credit delinquency has increased in the market in which we operate over the past 12 months.
Speaker 3: Lastly, all of the aforementioned drivers combined with the strong operating leverage of our platform and the initial maturation of our early products in Brazil resulted in a significant acceleration of net income growth, particularly over the past three quarters, as you can appreciate in the chart on the right. These compounded effects should continue to be observed over the coming periods.
Speaker 3: In Brazil, where we have been operating for nine years, our clients already account for a remarkable 46% of the total adult population of the country. It's staggering, and at the same time gratifying, to think that almost one in two Brazilians that own a smartphone is a new band customer.
Speaker 3: In Mexico and Colombia, where we have been for three years or less, our share of the total population is significantly lower. We're presenting a tremendous opportunity for growth as we expand our product offering and create lasting relationships with our clients.
Speaker 3: But so far, the experience we're having in Mexico and in Colombia is more positive than what we saw in Brazil in the first few years.
Speaker 3: With three years of operations in Brazil, we had 1.2 million customers, representing a penetration of less than 1% of the adult population of the country at that time, lower than what we now have in Mexico and Colombia.
Speaker 3: So, so far in Mexico and Colombia are bidding Brazil at effectively all metrics, from customer growth to early monetization, and plans for these countries are ahead of expectations.
Speaker 3: While our customer penetration in Brazil is significant, when we delve into the market share we actually own in each profit pool, it is clear that we still have substantial room to expand our presence.
Speaker 3: The first important insight from the chart on this slide is that two-thirds of all the profits of financial services in our three markets come from credit-related products.
Speaker 3: This fact confirms that it is virtually impossible to build a large financial services business in the region without having credit underwriting as a core capability. It is also one of the reasons we decided to start new with the credit first approach in 2013, as starting with payments and then pivoting to credit generally carries significant execution risk.
Speaker 3: Over the past four years, we have started to establish new tow holds in every additional credit segment.
Speaker 3: Today, our most mature product is credit cards, where we have only 11% market share in purchase volume across our three GEOs.
Speaker 3: We have resumed growth in our unsecured personal lending product in Brazil and expect it to be an important driver of revenue and earnings growth.
Speaker 3: Last quarter, we also launched Steel in Beta, our first secure lending product, what in Brazil is known as Consignado. We are very excited about the feedback we are receiving from early customers and expect to see meaningful acceleration in the segment or the next 4-8 quarters.
Speaker 3: In addition to building our core capability of credit in Brazil, we have also launched innovative products in investments, insurance, and marketplace. Since we already have one of the largest fully digital consumer platforms in Brazil, we are able to bring new customers to these verticals at virtually zero additional acquisition cost and serve them at an extremely efficient cost to serve.
Speaker 3: This not only allows us to gain market share, but also increases the size of the addressable market as we bring in consumers that have been traditionally underserved by incumbents.
Speaker 3: We are pursuing a similar roadmap in Mexico and in Colombia over the next few years, supported by internally developed technology platforms providing us both speed and quality.
Speaker 3: Beyond the significant growth runway we have ahead, the clear trend of the last nine quarters demonstrates the significant operating leverage of the platform and its potential to generate profits. Being the lowest cost manufacturer in an industry is a very important strategic position, and we believe we are reaching that point in Brazil.
Speaker 3: The charts on this slide illustrate this fact for business in Brazil, or most mature market. On the left, we show the efficiency ratio for our Brazilian unit over time.
Speaker 3: In the short time we've been operating in the country, at least compared to incumbents, we have been able to deliver best-in-class efficiency ratios with our cost-to-income ratio running now at mid-30% level. Meanwhile, the Charmed The right provides evidence of the operating leverage of our plastic.
Speaker 3: Our monthly R-Pack, our average revenue per active customer, expanded by 2.5x between Q1-21 and Q1-23, whereas our monthly cost to serve remained virtually unchanged.
Speaker 3: Impressive enough, but this is only the start of the process.
Speaker 3: The monthly R-Pack of our mature cohort is already upwards of $20, more than twice our current overall average, and the monthly R-Pack for incumbents is above $40.
Speaker 3: As we grow, we are sharing the profit pools we are targeting and close the gap in our pack to our peers, all while maintaining a multi-cost to serve below $1 per customer. We believe our efficiency ratio will set new records and our profitability will continue to increase.
Speaker 3: In talking about returns, I'd like to highlight the evolution of the key financial metrics we presented last quarter for both our holding company and our Brazilian operations.
Speaker 3: The momentum continued into the first quarter as you can see by the numbers on this slide. As our Brazilian operations mature, positive results continue to compound and profitability is accelerating. Overadjusted net income in Brazil reached an impressive $200 million in the first quarter, gaining an adjusted ROE of 43%.
Speaker 3: We achieved this result while maintaining a regulatory capital ratio of 18.7%, a cushion of over 80% on top of the minimum required of 10.5%.
Speaker 3: As our 3GOS scale and we enjoy the benefits of operating leverage that is inherent to our model, we are holding companies starting to convert its potential into profits.
Speaker 3: New Holdings adjusted net income of $182.4 million in the first quarter implies an adjusted return of equity of 14%.
Speaker 3: While our current levels of profitability are already on par with many traditional incumbent banks in the Latin American region, it's important to note that our excess cash of over $2 billion means that we're extremely well capitalized.
Speaker 3: Also important to remember that we are showing this level of profitability even while continuing to invest significantly in future products and while growing revenues by 87% year over year. With a new growth rate, the few financial institutions at scale are able to show.
Speaker 3: As seen, we are very excited with the momentum of the business and now I would like to pass it over to my partner and CFO , Guillermo Lago, to dig in deeper into the numbers. Go ahead, Lago.
Speaker 3: Thanks, David. Good evening, everyone. As David mentioned, we deliver another quarter of strong operating and financial KPIs. We did so by leveraging the same simple, powerful value generating strategy that we have now employed for a few years.
Speaker 4: This strategy can be summarized by three guiding principles.
Speaker 4: First, continue to grow our customer base in the markets in which we operate and quickly convert new customers into active ones.
Speaker 4: Second, expanding average revenue per active customer, or RPAC, through both cross-selling and up-selling. And third, delivering growth while maintaining one of the lowest operating costs in the industry.
Speaker 4: Much like in prior periods, our first quarter results showcase how we continue to execute against each one of these
Speaker 4: During the first quarter, our customer base increased at a solid pace.
Speaker 4: We added 4.5 million customers for a total of 79.1 million, a 33% increase year over year. In Brazil, our pace for monthly net ads continued at almost 1.5 million customers.
Speaker 4: the vast majority of which still come from referrals, which means lower acquisition costs and faster activation.
Speaker 4: Our client base in Mexico and Colombia also evolved positively and will likely accelerate even further once we are able to have our checking accounts up and running in both countries.
Speaker 4: This has already happened in Mexico where we have just crossed the level of 500,000 checking accounts open in less than a week after our official launch of Quentinu.
Speaker 4: Once we add customers, our goal is to activate and have them engage with our platforms and love us fanatically.
Speaker 4: On this base, the first quarter was also a success. Our monthly activity rate increased to 82.1% up from 78.0% a year ago. The ninth consecutive quartile increase.
Speaker 4: We are seeing positive and increasing momentum in activity in all of our three markets.
Speaker 4: The second pillar in our strategy is revenue expansion. The first chart is our primary banking relationship chart. It represents the percentage of our active customers who transfer to us every month more than 50% of their post-tax income.
Speaker 4: Nearly 60% of our active customers are already primary banking relationship customers.
Speaker 4: and the pace at which our active customers become our primary banking relationship customer has happened faster and faster over time driven by two types of factors.
Speaker 4: First, external factors such as COVID, peaks, and the overall growing adoption of digital banking.
Speaker 4: Second, internal factors such as the launching of new high quality products and features.
Speaker 4: The second chart is our product cross-sell chart. As we have launched new products, we have successfully cross-sold them to our customers and earned the right to be the primary banking relationship of them.
Speaker 4: Now, the third chart is our R-Pack chart, and it represents the compounding effect of our expanding customer engagement shown in the first chart with our growing product cross-sell shown in the second chart.
Speaker 4: In the last quarter, our monthly RPAC reached a record high of $8.6.
Speaker 4: Yet, the monthly RPACs of our more mature cohorts are already above $20 and the monthly RPACs of the customers who have bought our three core products.
Speaker 4: Banking account, credit card and personal loans are above $30. We have a long runway ahead of us.
Speaker 4: On this slide, the chart on the left shows that our monthly RPAC continues to grow sequentially and was up 30% year-over-year on an effects-neutral basis.
Speaker 4: Our ARPAC growth, together with the expansion of our customer base, drove an 87% increase in revenues year over year to $1.6 billion, also a record high.
Speaker 4: This slide provides some more details on our cards business.
Speaker 4: For cards, purchase volumes are seasonal.
Speaker 4: Higher in the fourth quarter and lower in the first quarter of every year.
Speaker 4: Compared to the first quarter of last year, our purchase volume was up 48% on an effects neutral basis.
Speaker 4: to $23.3 billion.
Speaker 4: Sustaining its strong growth path.
Speaker 4: The chart on the right shows how purchase volumes expand as cohorts of customers develop and mature.
Speaker 4: Older cohorts continue to purchase in higher volumes.
Speaker 4: spanning three to four times more per month than recent cohorts.
Speaker 4: As we mentioned before, on average, a customer's credit card expenditure triples when they have been with us for more than 24 months.
Speaker 4: We expect the compounding effect of adding millions of customers each month, along with the maturation of these new customers into historically observed disbanding patterns to provide ample support for the growth in future purchase volumes.
Speaker 4: Looking into reported purchase volumes transfer to industry, new ended last quarter with a market share of around 13.6% adding both credit and prepaid cards, an increase of 40 basis points quarter over quarter.
Speaker 4: This quarter, our consumer finance portfolio composed of credit card and personal loans reached $12.8 billion, a 54% expansion year over year.
Speaker 4: Despite negative seasonality in purchase volumes, total credit card receivables expanded sequentially and increased 64% year over year driven by client growth and the net revolution of our low and grow methodology. More importantly, the
Speaker 4: our personal loan portfolio expanded significantly in the quarter. As you might remember, through most of 2022, we were cautious with originations and personal loans. A posture resulting from the increased risk we perceived in the product during the period.
Speaker 4: Starting late last year, as Yusef will explain later, our portfolio exceeded our expectations in terms of performance, which gave us confidence to take bolder steps with originations.
Speaker 4: As a result, our personal loan book increased 18% quarter over quarter to $2.3 billion.
Speaker 4: Let's now move to the breakdown of interest earning loans in our portfolio.
Speaker 4: We continue to pursue a strategy of increasing the share of our credit card loans that earn interest.
Speaker 4: This quarter, our interest earnings balance once again gained share, representing a record high 16% of our credit card loan book. We prefer interest earning installments where we see attractive risk adjusted rates of return that allows us to further monetize our credit card business.
Speaker 4: over revolving receivables where we see a less favorable risk return profile and higher adverse selection.
Speaker 4: We have intentionally not expanded our share of revolving receivables, which continue at 7% of total credit card receivables for the third consecutive quarter. Because of this, new widened the gap versus the market, where revolving receivables accounted for 18% of credit card receivables.
Speaker 4: as of the end of the first quarter. The performance of our personal loans cohorts improved over the last several months, giving us the conviction necessary to increase loan originations. As our portfolio continues to show strong resilience in performance...
Speaker 4: we progressively increase our risk appetite, deploying capital, possibly and consistently.
Speaker 4: Our launch of payroll lending would add to this strategy, reinforcing our opportunities for growth in originations.
Speaker 4: We are confident in our ability to drive responsible growth in lending. This belief is supported by our best-in-class underwriting platform, our strong capital base, and our ample liquidity position.
Speaker 4: Moving to funding, supported by the growth in our customers base, total deposits expanded 34% year over year.
Speaker 4: It's important to note that fourth quarters are seasonally strong for deposit inflows, while third quarters are seasonally weak.
Speaker 4: Our long to deposit ratio achieved 32% this quarter, showing the new optimized use of those deposits quarter after quarter.
Speaker 4: In the fourth quarter of 2022, our cost of funding dropped to an all-time low of 78% of the interbank deposit rate, driven by three factors.
Speaker 4: The full impact of the recently launched Moneybox.
Speaker 4: the change in the remuneration of new accounts, and the seasonally higher levels of deposits at the end of the year.
Speaker 4: As we had anticipated previously, our cost of funding should oscillate upwards to approximately 80% of CDI over the initial three quarters of the year. In this context, the level of 81% of CDI observed this quarter is in line with our expectation.
Speaker 4: and also shows that we are starting to unlock the value of the strong liability franchise we have been able to build.
Speaker 4: With the recent launch of Quintonu in Mexico
Speaker 4: which in less than a week after its official launch already surpassed 500,000 accounts open, we are offering a more compelling value proposition for customers in the country and should be able to onboard more individuals month after month.
Speaker 4: helping to further strengthen our deposit franchise in the country. We expect the same to happen soon in Colombia.
Speaker 4: The combination of the continued growth of our credit portfolio with the new normal in our funding costs have contributed to the expansions of our net interest income or NII and net interest margin or NIM to record high levels.
Speaker 4: Our NII reached $815.3 million this quarter, drawing an impressive 138% year-over-year. Our mean increased by 2.2 percentage points quarter-over-quarter and 7.2 percentage points year-over-year to 15.7%.
Speaker 4: Let's now turn our attention to the last pillar of our overall strategy, maintaining a low cost to serve.
Speaker 4: We continue to believe our platform is one of the most cost-efficient in serving customers in the markets in which we operate.
Speaker 4: In the first quarter of 2023, our cost to serve per active customer was 80 cents, largely flat year over year, while over the same period our ARPACT increased 30%.
Speaker 4: This illustrates the strong operating leverage of our business model.
Speaker 4: Looking ahead, as we said in past quarters, we expect our cost to serve to remain at or below one dollar level as the scale gives a significant operating leverage and bargaining power with our suppliers.
Speaker 4: We recorded $651 million in gross profit in the first quarter.
Speaker 4: This was up 124% year over year, representing an important acceleration compared to the growth posted last quarter.
Speaker 4: Following a similar trend, our gross profit margin reached 40.2% in the first quarter, almost 7 percentage points higher year over year, consolidating the acceleration in the pace of expansion that is started in the third quarter of 2022.
Speaker 4: We achieved this result even with a higher amount of provisions this quarter as a result of the expansion of the originations of our landing portfolio as we upfront provisions.
Speaker 4: and a slightly higher cost of funding in comparison to last quarter's due to previous mentioned seasonal patterns.
Speaker 4: We continue to see operating leverage as a defining feature of our strategy.
Speaker 4: It is best illustrated by our efficiency ratio, which in the first quarter improved for the fifth consecutive time to reach another all-time low at 39% or 33.5%, excluding share-based compensation.
Speaker 4: This level of efficiency would already rank new holdings as one of the most efficient players in Latin America. That said, we see this as only the beginning, as we expect to benefit from the full potential of our platform's operating leverage as we continue to grow our customer base.
Speaker 4: upsell and cross-sell products, launch new features, and inflect results in our new geos of Mexico and Colombia, which still run at assets.
Speaker 4: In fact, looking into Brazil only, we would already be running at levels of cost to income in the mid 30s.
Speaker 4: which would likely place us as the most efficient among the big players in the country, although still in the early stages of our rampart.
Speaker 4: Finally, moving to net income, we posted yet another quarter of improved bottom line performance.
Speaker 4: Our adjusted net income and net income amounted to $182.4 million and $141.8 million, respectively.
Speaker 4: To us, these encouraging results are validating our strategy and business model.
Speaker 4: While we are encouraged by the results in the first quarter, it is important to reinforce that we manage our business with a view towards long-term value creation.
Speaker 4: This can require additional investments in the short term aimed at optimizing our long-term opportunities.
Speaker 4: To review our performance in the first quarter from a different viewpoint, I would like to highlight the sustainable advantages we are maintaining across 4 cost pillars.
Speaker 4: On cost to acquire, we added more than 4 million customers in the quarter with the same low CAC as in prior periods.
Speaker 4: on cost to serve, despite persistent inflation in the countries in which we operate, as well as two businesses that are yet to reach scale, our cost to serve remains below $1.00.
Speaker 4: On cost of risk, we successfully managed the risk in our credit portfolio, aiming a very challenging backdrop, and continue to outperform competitors when comparing apples to apples.
Speaker 4: UCIP will provide more details shortly. And lastly, cost of funding. We began to unlock the potential of our deposit franchise.
Speaker 4: closing the negative gap we had against the incumbent banks, and widening the positive gaps against fintechs.
Speaker 4: We are very excited about what we have been able to achieve and are confident in our ability to develop and scale best in class products, expanding internationally, and operate at very low costs.
Speaker 4: Now I'd like to turn the call over to Youssef, our President and Chief Operating Officer, who will walk you through some highlights of our asset quality.
Speaker 2: Thank you Lago and good evening to you all. Let me take you through some of the key indicators of asset quality and credit portfolio health for the first quarter of 2023.
Speaker 2: Let's start with NPL trends. Seasonally, the first quarter represents a high point for early-stage delinquencies. Specifically, 15 to 90 NPLs rise on average by 80 basis points going from Q4 to Q1 based on our historical data and in line with the rest of the market.
Speaker 2: In Q1 2023, our 15 to 90 NPL ratio came in at 4.4%, increasing by 70 basis points from the fourth quarter of last year, which is 10 basis points lower than our historical trend.
Speaker 2: This slightly lower than seasonal norm increase was mainly driven by the improvements in our personal loan portfolio, itself a result of the actions we took last year.
Speaker 4: Our 90 plus NPL ratio increased from 5.2 to 5.5 percent as a result of the normal flow through the delinquency buckets. As we discussed in the past, 90 plus is a stock rather than flow metric, so you get this sort of stacking dynamic over time. And since we do not and have not sold any delinquent loans, we are going to be looking at the
Speaker 2: we do not get the purging effect of asset sales, which would artificially lower NPLs. With respect to loan renegotiations, they remained at around 8% of the book in the first quarter, with approximately half of those coming from customers who are current and not past due at the time of renegotiation.
Speaker 2: This is a result of us making it very easy for our customers to have active control over their finances. Many of them take advantage of that feature and go directly to the new app to edit their loan and payment schedule and make them more convenient and better synchronized.
Speaker 2: This is counted and reported as a renegotiation, even though it's not necessarily representative of a credit stress situation.
Speaker 2: The six graphs on this slide show the time series of NPL for credit card loans by income band where the purple line represents new and the gray line represents the industry. Much like in prior quarters, we continue to outperform the industry on a like-for-like basis. Under the lower income band, our comparative advantage continues to be even more pronounced.
Speaker 4: Provisions have continued to grow, primarily driven by the growth in our portfolio, following the same dynamic as in prior quarters. We front-load provisions when we originate loans based on the expected losses for the life of the credit, in accordance with IFRS 9's expected loss methodology. The increase in provisions in the first quarter, therefore, is directly related to the increased volumes of...
Speaker 4: for X compared to the levels of the first quarter of 2022.
Speaker 2: Having shared these data and perspectives on credit and asset quality, let me now turn the call back over to our founder and CEO , David Velez, for his concluding remarks.
Speaker 4: data and perspectives on credit and asset quality, let me now turn the call back over to our founder and CEO , David Velez, for his concluding remarks. Thanks, Yousuf.
Speaker 3: As we wrap up, I wanted to leave you with some thoughts about the future. This week we're turning 10 years old, and we couldn't be more excited about what's ahead for new. In 10 years, we've been able to amass a combination of skills and capabilities that position us at a very differentiated place. As a result of working extremely hard on our mission of fighting complexity to empower our people, we have built one of the most loved and trusted brand new technologies in the world.
Speaker 3: which is increasingly a key piece of our product design and artificial intelligence strategy. We have built unique capabilities in credit underwriting and financial services, helping us to develop a profit engine that we will use to reinvest in our services, verticals and geographies.
Speaker 3: And finally, we believe we have assembled one of the best technology and product teams in the world unique for a Latin American company.
Speaker 3: These ingredients are important pieces to what we decide to now go build over the next 10 years.
Speaker 3: And as we plan for the long run, we think there is an opportunity to see ourselves more as a consumer platform that enables the optimization of money on behalf of its users.
Speaker 3: We have named this new category a Money Platform. The Money Platform is a technology platform that has the optimization of money on behalf of its users at its core. The same way that a social platform has social interactions such as text or photos or videos as its core. The Money Platform's mission is to help consumers and small businesses.
Speaker 3: fully optimize the creation and usage of their wealth across every single financial decision, from investing to lending to day-to-day spending.
Speaker 3: Not only do most individuals and small businesses make poor financial decisions, whereby investing in suboptimal products, overspending on goods, or over-barrowing, but also they often pay excessive or unnecessary interest charges and fees to intermediaries. These costs can be detrimental to the economic welfare of an entire society.
Speaker 3: Just imagine the amount of additional wealth that could be created for every member of society if every money related decision, including purchasing the right goods at the lowest cost, was always optimized.
Speaker 3: This is a vision we have been pursuing for quite some time now, but we're very excited about how the advances in generative AI will help us to accelerate reaching this goal, and we intend to make investments methodically to seize this opportunity.
Speaker 3: Our strategy to get there is to continue building a comprehensive digital financial platform that provides the best financial products fully digitally across the five financial seasons – spending, saving, investing, protecting, and borrowing. And in parallel, we use the brand, scale, data, profits, and talent we have to go beyond financial services and enable our customers to purchase products and services from our marketplace partners.
Speaker 1: investors and analysts. If you wish to ask a question, please press the reaction button and then click on raise your hand. If your question is answered, you can exit the QE by clicking on put your hand down. Please limit yourself to one question and a follow-up.
Speaker 1: If you have further questions, please re-enter the Q&A. You may submit online questions at any time today using the Q&A box on the webcast.
Speaker 1: I would like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer.
Speaker 2: Thank you operator. And the first question comes from the line of Jorge Pude at Morgan Stanley .
Speaker 5: Hi everyone and good afternoon and congrats on the fantastic numbers and congrats also on your 10th year anniversary. I wanted to ask about payroll loans, evidently a big product that you are doing either on a beta testing or already launched and I wanted to no video but Taekwondo was published and login because of it.
Speaker 5: see if you can share with us some of the results that you're seeing so far. You know, what type of cross-selling are you getting? Is it mostly INSS? Is it mostly government workers? What type of rates and opportunities are you seeing your customers take?
Speaker 5: what is this doing to your R-pack? If you can share sort of like what the R-pack would be for a payroll loan, what does it do for your return on equity? So that we understand as that business ramps up, how does it change your KPIs?
Speaker 4: Thank you. Jorge, thank you so much for your question. This is Lago. Look, I'll try to share some of my thoughts and then I'll pass it to Jack to complement with the recent experience that we have had. But entering payroll loans to us is a super important venture, not only from a financial perspective, but also from a strategic perspective.
Speaker 4: I think first you have to step back and realize that payroll loan is the single largest asset class that you have in consumer finance in Brazil. It accounts for about 560 billion reais of loans in the country and one of the largest profit pools that you have in the region.
Speaker 4: And our customers, if we take the social security numbers of our customers, and if we take them to the Brazilian Central Bank database, they already account for about 31% of the entire payroll loans in Brazil. So that means that we don't need to fish outside of our fishbowl to tap into one third of this very, very large market.
Speaker 4: And we intend to do so, no collateral agreement after collateral agreement. We started with CIP, which is the payroll loans offered to federal public servants. We have also announced that we will follow this with INSS, which is payroll loans for pensioners and retirees. And we intend to expand this progressively as we learn more about the process.
Speaker 4: They range anywhere between 1.5 and 2% per month. But you know, conversely, payroll loans offer one of the lowest, if not the lowest delinquency levels that we have in the industry and also a very low regulatory capital requirement. It's about 50% of the regulatory capital requirements that you would need for unsecured personal loans.
Speaker 4: the consequence of this compounding effect and to the fact that we will not use loan brokers. We will do direct-to-consumer originations and therefore we will remove about 15 to 18 percent in origination cost is a product that we expect to provide us with ROEs at or higher than 30 percent.
Speaker 4: Therefore, we expect two things to happen in our overall company economics. One, the acceleration of the personal own books. Secondly, a progressive reduction in delinquencies overall. But Jag, I will let you comment on our recent experience and how excited our customers are with this product. Thank you, Lago. Another question, Jorge.
Speaker 2: I'll just compliment a couple of things that Lagos said as he laid out the big picture. From a product perspective, it is still early days. We launched the product and are still rolling it out in April .
Speaker 2: but we followed a pretty classic New Bank formula of launching a mobile product.
Speaker 2: that is very simple to sign up for, direct to consumer, with a very transparent set of pricing and terms and conditions.
Speaker 2: What we are hearing from the early customers who have started to engage with us on Consignato, particularly Siappi Consignato.
Speaker 2: is genuine delight with the simplicity of the signup flow.
Speaker 2: of the transparency of the product, how easy it is to understand. And we are in the midst of testing a fairly wide range, wide spectrum of pricing, which we will optimize over time.
Speaker 2: But what we found is a set of customers who are extremely reactive to the pricing and the fact that we can leverage our cost advantage as Lago alluded to to give customers a fair price.
Speaker 2: So that combination of a fair price along with a simple mobile product has given us a response that has exceeded our expectations in the early stages of rollout. We are being very careful and stepwise in that rollout process to get the product, the pricing and the experience right. But we couldn't be more encouraged.
Speaker 2: in the first month or so that we've put the product out there. As Lago mentioned, Consignor Ociapi is just the first step of our payroll lending roadmap through this year and beyond. INSS and other groups of federal employees, public employees, public sector employees, and
Speaker 6: are on our roadmap and we're working systematically through those agreements.
Speaker 6: are on our roadmap and we're working systematically through those agreements. Thanks a lot and congrats again.
Speaker 2: And our next question comes from the line of Tito Labarta from Goldman Sachs.
Speaker 7: Hi. Good evening, everyone. Thank you for the call, taking my questions, and also congratulations on the very strong results. My question is on the personal loans. We saw a very strong acceleration in the origination.
Speaker 7: this quarter despite, you know, acid quality still deteriorating. I know there's some seasonality there. But, you know, just how you think about this going forward and I think initial signs, you feel comfortable with the acid quality outlook, but is there room to accelerate this product more?
Speaker 7: this year just to think about how that will continue to grow throughout the year and as potentially as the quality may begin to improve.
Speaker 4: Hi Tito, thanks for the question. This is Yousuf. So yeah, with respect to the unsecured personal loan book, as you recall, towards the middle of last year, we decelerated a bit origination. It was a lot more uncertainty at that time around, you know, what sort of normalization post COVID we would see we didn't have a reference point, unlike in credit cards for what pre COVID looked like.
Speaker 4: We were pretty cautious. In the time period since then, we've made several improvements in terms of pricing, in terms of models, in terms of the resilience of our originations, and we just accumulated a lot more data, more data on more customers across more products. What you see is the combined result of all of those things, whereby
Speaker 4: We've observed performance of our most recent cohorts to be quite strong and in fact actually a bit better than what we expected. And so that's given us a lot more confidence to reaccelerate and grow quite a bit in this segment. As an aside, the movement on delinquency rates is completely explained by seasonality.
Speaker 7: Okay, great. Thank you. That's helpful. If I can ask a follow-up then. As you continue to accelerate growth both here, credit cards also had strong growth and you're getting into the payroll lending. You delivered about 11% ROE in a quarter. As you accelerate your long growth and as we've mentioned tonight.
Speaker 4: Thanks for your question. We do expect that the profitability levels that we have showcased in the last two quarters in Brazil and overall.
Speaker 4: to be at sustainable levels. We don't provide necessarily guidance on where they will be precisely. But if you take a look at our Brazilian operations, we are far from being at an optimal structure in terms of costs and in terms of leverage. There's way more room for improvement there.
Speaker 4: And we continue to invest for the future. We continue to invest in cost and expenses related to the development of new products and features.
Speaker 4: But if you take a look at the three geos in which we operate, we do expect to have relatively similar levels of returns by leveraging our very advantage cost structure.
Speaker 3: I see David here just setting one more point here. I mean, I think to be frank, it's not.
Speaker 3: It should not really come as a surprise as it's very consistent with the view we've discussed with investors now for over a decade around the efficiency of the business model. The moment that we are able to serve 80 million customers with about 8,000 people from one centralized location at a cost to serve that is about 20x more efficient than traditional banks.
Speaker 3: without the banking branches, with the benefits of using a lot of data to do underwrite and to cross-sell at effectively no additional customer acquisition costs. All of those factors ultimately just drive into this return of equity that we're finally able to show in more mature operations like Brazil. And this is still in an operation where we're growing 100%.
Speaker 3: year or year and we're still investing a lot for growth in Brazil for 2024, 2025, 2026. Investing in a lot of new products and verticals that are still generating zero or will generate zero revenues for a while. So we think there is a lot of opportunity ahead to continue driving that return on equity at those levels and potentially up. But it's still very, I would say, consistent with the way we're going to move forward.
Speaker 2: I think we've been all along said that the model itself carries pretty significant cost advantage. That's very clear. Thanks, David. Thanks, Marco. Our next question comes from the line of Daniel Vas from Credit Suisse.
Speaker 8: Thank you everyone for the opportunity and congratulations on the strong results. It is indeed very impressive to see the high profitability in Brazil after reaching a more mature level. In Mexico and Colombia we still see early stages.
Speaker 8: And it would be very helpful if you could share with us some insights on the 2022 cohorts on RPAC and asset quality of evolution. And maybe compared to Brazil and compare the potential to Brazil. And also if I may, I was curious about Jag's quote on an interview that you should not listen to clients 100% but to ask the right questions, right? How does that determine their pains?
Speaker 8: So I wanted to know in Mexico versus Brazil how this has been playing out considering the particularities among each countries. Thank you. Hi, Daniel. This is Yusuf. So with respect to benchmarking Colombia and Mexico to Brazil, I would break it into three parts. First comparing credit cards.
Speaker 4: credit card products across the three markets. You know one of the main differences you see is both in Mexico and Colombia consumers tend to use credit cards as you know not just a means of payment but also a borrowing vehicle.
Speaker 4: So you tend to get higher rates of revolves which in turn cause both RPAC to be higher and NPLs to be higher but on a return basis, they produce comparable levels of ROA and ROE.
Speaker 4: The second point I would make is when we look at our experience so far, you know, the three years since we launched Mexico and the year and a half or so since we launched Colombia, if anything, we're seeing the Brazil playbook to work very well in both countries. And, and, and.
Speaker 4: we're actually able to capitalize on all the work that's been done in Brazil, the platforms we've developed, and actually execute on a faster basis in both Mexico and Colombia. So we see, you know, faster time to market, faster launch of new products and new features, and even higher levels of NPS and penetration compared to Brazil at the same point in time.
Speaker 4: us to now say yes to offer a product and to say yes to everyone who applies to new. It's going to allow us to gather a lot more data to underwrite better on those customers and it's going to allow us to build a solid local deposit base to be able to grow credit card and other lending products going forward.
Speaker 2: Okay, thank you. And our next question comes from the line of George, from autonomous.
Speaker 6: discussion about changes to the way the credit card market works in Brazil, potentially capping the revolving rates, which I know can be very, very high. What's your take on what comes out of that, if anything?
Speaker 4: Hi, Josh. This is Lago. Thanks for your question. Look, the discussion is about reviewing the economics of credit card in Brazil.
Speaker 3: have been ongoing for many years involving both the government and many industry participants. And these discussions are not simple because the topic is indeed highly complex. And it's highly complex in my view for two reasons. Number one, because the credit card is a very big industry in Brazil. It accounts for about 40% of the personal consumption expenditures and over 20% of the GDP of the country.
Speaker 3: most bear any interest versus about 70% in most other countries.
Speaker 3: And this creates a number of no idiosyncrasies and cross subsidies.
Speaker 3: And not to mention that the industry also has many, many stakeholders such as merchants, acquirers, networks, issuers and consumers. So a fairly complex puzzle to be cracked. Now we have had the opportunity to engage in very constructive and technical dialogue with the Brazilian government and other industry participants.
Speaker 4: and believe that the Brazilian government has fully comprehended and assimilated the complexities of the credit card industry and the multiple economic levers that exist, such as no interest rates, interchange rates and interest fees, and believe that you cannot change one thing without also changing the others.
Speaker 2: So even though it's probably too premature at this point in time to draw any conclusions or expectations as to when and how those discussions will unfold, we are very confident that they will unfold in a matter that is very balanced and will not put at risk the gains in financial inclusion and competition.
Speaker 6: that have been acquired by the country over the past decade. And the 40% or I think this quarter 43% ROE in Brazil, clearly a very impressive number, but
Speaker 6: Do you think that could become problematic in those discussions? Sometimes politicians look at returns and think, wow, this is getting really high. Maybe I should do something about that. I think two comments I would say. So I think first and foremost, the returns that we have here are the result of NOAA
Speaker 2: a very, you know, superior cost advantage that we have. I wouldn't say that the returns that we are posting in our operations in Brazil are market level returns, much less they are reflective of our standalone credit card operations. That's, you know, first con. The second one is,
Speaker 2: The discussions that we have had with the government have proven to be super technical and constructive. So I would be surprised if anyone would anchor on one or two quarters of returns to contaminate the dialogue.
Speaker 9: Thanks very much.
Speaker 2: And our next question comes from the line of Pedro Leducchi. Thank you guys so much for the call question. A little bit on the credit card loan book is still growing very fast. If you could help us understand a bit.
Speaker 3: on how much is higher limits on usage per client instead of new clients. And perhaps a second question tied to that, an update and anything this quarter that we're already seeing your effort to move up the higher income clients on lay up perhaps some actions that you're taking there but really understand a little bit your credit card loan book growth.
Speaker 3: for clients instead of new clients. And perhaps a second question tied to that, an update and anything this quarter that we're already seeing your effort to move up the higher income clients on lay up perhaps some actions that you're taking there, but really understand a little bit your credit card loan book growth. Thank you.
Speaker 4: I would say on the credit card we are continuing to see as you point out really strong growth. We are really pleased with the performance of the portfolio overall and also when we look cohort by cohort at the latest cohorts both on a return on NPV and NPL basis.
Speaker 4: they have come at or even slightly better than our expectations. So we remain pleased with the performance of that book and really encouraged by the prospects of growth going forward. And one thing I would point out, which is even if credit card is our most mature.
Speaker 4: and oldest product, we have now about 40% or so of all adults in Brazil as customers. Our share of purchased volume credit cards is only 13%. We just crossed 13% in the quarter. And so we see a lot of runway to continue to gain share above and beyond continuing to add customers. And I'll let Jag comment on our efforts on the upmarket segment.
Speaker 4: Thank you, Yousif. Pedro, thank you for the question. Let me first provide a little bit of context on generally how we approach the building of products. So we always look at any new product we're building or any customer segment we're trying to address.
Speaker 4: with a fairly standard approach and formula. First, we wanna build a strong relationship with our customers. Second, we wanna work to gain principality and a lead position. And third, we monetize. Those things don't necessarily happen in sequence, they can happen in parallel, but that's generally the stack rank.
Speaker 4: of our approach and how we think about it. When it comes to the high income segments focused particularly on Brazil, we already have as customers.
Speaker 4: about six in ten of those high-income customers in Brazil are already NewBank customers that have a credit card, a bank account, and other products with us.
Speaker 8: And so we already have a great starting point in terms of an established relationship with those customers. In fact, quite recently, Bain just published its most recent PRISM NPS report for Q1. And what that shows is that
Speaker 4: the segment of customers where we have actually our highest NPS is with the high income customers. Now that's a segment where.
Speaker 4: many players have a stronger NPS relative to other segments. But our lead in that high-income segment on customer love, on NPS, is roughly the same. It's in the same ballpark. So we're encouraged that we are establishing credibility and trust with that customer segment.
Speaker 4: And we're starting to see that in our products, whether it's in the credit card product area or others, where we're getting increasingly confident based on the activity we're seeing with high income customers that they're starting to believe.
Speaker 4: and think of New Bank as a bank that they can work with. And so that progress that we are seeing over the last couple of quarters is starting to give us increased confidence that we can address that segment with a full suite of products.
Speaker 4: credit card as always is usually our lead product and that's been several years and lots of work on the roadmap to start to make that happen. I appreciate it. Thank you.
Speaker 8: And our next question comes from the line of Eduardo Rosman at BTG PAC 12. Hi everyone, congrats on the numbers. I have a question regarding your underwriting skills which is also a follow-up to what Jack just explained.
Speaker 8: Clearly you are doing a very good job, right, since you've been able to grow a lot over a long period of time and also with better asset quality. But that's particularly true on credit cards, right. Here the way I see you with the best product, particularly for the average Brazilian. Do you think that the quality of your product and the high principality that you have with your class createsolithic e proportions
Speaker 8: Do you think that it's just a matter of time or the product is just different?
Speaker 8: of time or the product is just different. Thanks.
Speaker 4: Hi, Hausman. This is Yousaf. Thank you for the question. So let me try to address in turn the points you raised. So I would say like when we look at our experience in credit cards and in unsecured personal loans.
Speaker 4: We see, you know, the methodology, the playbook, the governance process, the data, the tools we've developed to work just as well. Obviously, the personal loans is a lot more recent since inception than credit cards.
Speaker 4: But when we compare at the same point in time, we see a relatively similar level of leverage that we get from all those methodologies and processes and governance we've developed.
Speaker 4: And I don't think it's a leap of faith to believe that it would extend to other categories beyond unsecured personal loans in terms of the underwriting advantage it gives us. To your other point on willingness to pay, yes, we do see some evidence that Jack
Speaker 4: we have a willingness to pay advantage, in particular when we look at things like, principality customers that we've reached primary bank account relationship status with as Lago was mentioning earlier. And so that has to be a product of a lot of things, some tangible in terms of, how we service those customers, some perhaps intangible having to do with brand, having to do with loyalty, having to do with NPS.
Speaker 10: question. Let me ask you a question on funding costs and deposits.
Speaker 10: I think Lago mentioned that the funding costs should stay around 80% of CDI in the next few quarters. Just wondering if this number shouldn't be lower in the longer term given that some of the incumbent banks have funding costs of like 65% of CDI.
Speaker 10: What if your strategy in remunerating deposits would change in a lower rate environment? Because before, right, historically you were remunerating clients at 100% of CDI. So I don't know if the reason why you think that 80% is the right number.
Speaker 10: doesn't mean that you'll be willing to remunerate clients higher if rates come down. And then when I look, you know, you talk about your deposit base.
Speaker 10: staying stable in the quarter. There's some seasonality in the fourth quarter, which we do agree on, but when I look at your deposit per client, it has been trending down. So I don't know if that is a function of the change in remuneration, what do you think explains the lower...
Speaker 2: funding will remain at around 80% of CDI. It is, we can't be super precise on this because it largely depends on customer behavior. And we don't offer 80% of CDI per se. We basically offer a combination of products, which is composed by the money box and the demand deposits.
Speaker 2: that compounding with the customer behavior that we have observed results in an around 80% of CDI. We do expect this to remain as such and usually in the fourth quarter of each year, there's a slight drop in the cost of funding because there is no
Speaker 2: seasonally high inflow of deposits as we observed in the fourth quarter of 2022. So too we expect to observe in the fourth quarter of 2023 but by and large
Speaker 2: it should remain at about 80% of CDI throughout the next four quarters. We do believe that there is the opportunity for us to continuously reassess and reflect on the value proposition that we are offering to our customers with respect to their savings and investments. At this point in time, we do not have any short-term plans.
Speaker 2: to actually change those features that will lead us to lower funding cost, although we do appreciate that there is a value lever there. If and when we find a value proposition that will be actually be net positive to our customers, we should certainly entertain, but you should not expect any material change to the funding cost over the next no.
Speaker 2: for our quarters. So I think that's the first part. The second part we did see kind of a a slight drop I want to say of about five or six percent in deposits per customer in the first quarter of 2023. That is largely seasonal based on what we have seen. In fact, if you look at the Brazilian market
Speaker 2: the demand deposits of the whole system during the first quarter of 2023 dropped by about 10%. So the average demand deposit per customer of NewBank dropped by about 5-6%. In fact, we gained some shares. And what we have seen post the end of the first quarter of 2023,
Speaker 2: It continues, deposits continue to behave as expected, and we do not see, as we mentioned in the prior call, any relevant impact to our inflows or outflows as a result of our having changed the remuneration of the content introduction of Moneybox in the third quarter of 2022.
Speaker 10: Great. Just briefly then, stay on deposits. If you can talk about the duration of the deposits.
Speaker 2: and how you could change this going forward, especially as you go into longer-term products such as payroll loans? No, absolutely. That is a great question. And we do expect to now continue to increase the average duration of our deposits as we've increased the average duration of our credit assets.
Speaker 2: That will be largely tied to the ramp up of our payroll loan book. And we can do so primarily through the offering of time deposits to our own retail customers. Okay, thank you very much. Thank you, Mario. And our next question comes from the line of
Speaker 5: Rafael Faraghi from Citi. Hi, guys. Good evening. Congrats on the results. I have a follow up on your credit card book. So you had a huge increase in the receivables paying interest, right?
Speaker 5: This was a relevant portion of increasing the profitability of the quarter. I would like to understand a little more about the initiative that you have been taking to increase the receivables with interest in this portfolio. If you think that we are close to a level that should be sustainable.
Speaker 2: some more room to go. So just so try to understand what's going on in the light. Thanks. Yeah, no, absolutely. That is a great question. And in fact, I would try to draw your attention to page 16, in which we provide the breakdown of exactly what you said the interest earning portfolio within the credit card.
Speaker 2: And as you can observe, the non revolving interest earning portion of our credit card book has grown from about 8% of the total book to 16% of the total book in a year. So a fairly no relevant increase. And we are very pleased with that performance. What is the source of that performance? I think we are basically managing to develop new financing products and features.
Speaker 2: through which customers can actually now gain financing capabilities through their credit cards, mostly related to PICS financing and Bolieto financing.
Speaker 2: So those two features now account for the best majority of this increase. And what I would highlight as well, if you also look at the interest earning portfolio, is that while our non-revolving interest earning portfolio went from 8% to 16%, the revolving part remained largely flat. And what we have learned over the past four or five quarters...
Speaker 2: is that these additional financing features has resulted in no incremental credit risk to our book, which is I think a very pleasing output for us.
Speaker 2: that these additional financing features has resulted in no incremental credit risk to our book, which is I think a very pleasing output for us. …
Speaker 2: to understand here is what I think that's very curious is that when I look for the interest rates on credit cards they're close to 9% if I'm not wrong according to Brazil Central Bank while the personal loans have a lower rate so I'm curious why a client is taking credit card
Speaker 2: installments instead of personal loans? And maybe part of the question you already answered because it's products that probably are not available on personal loans, right? So just to understand why the clients financing through that. Yeah, I think it's important to note that the interest rates of those financing features within credit cards, what I'm calling PICS financing or Bolletto financing, are closer to 5 to 6 percent per month. So much more in line with unsecured personal loans.
Speaker 9: Okay, that's perfect. Thank you. No, thank you.
Speaker 2: And our next question comes from the line of Gustavo Schrodin at San Francisco.
Speaker 8: Hi, good evening everybody. Thanks for the opportunity and congrats on the strong results. I would like to switch the discussion to operating expenses or the cost side.
Speaker 10: We discussed a lot about the revenue generation and indeed the main beat versus our numbers here was on the operating expenses. I'd like to understand because we finalize the evolution of especially the non-revenue link at the expenses. I'm talking about SG&A and marketing expenses.
Speaker 10: to keep or to continue decreasing the non-revenue linked expenses in the coming quarters or this was some adjustment that the bank did in the quarter especially and as I said that's G&A marketing expenses it draws our attention
Speaker 2: number eight of our financial statements that probably bring a very detailed breakdown of those operating expenses. But I think if you look at those statements you will realize that within operating expenses which grew by only 12% over the period, you largely have two items. You have customer support and operations which over the past 12 months grew by 75%
Speaker 2: and you have GNA, which basically stayed flat now over the past 12 months. And within GNA, if you, the main things there are payroll and share-based compensation.
Speaker 2: And Gustavo, to your point, there are a few things there that are non-recurring and a few things that are recurring. Let me try to break them down. One of the main impacts of the largely flat or decrease in GNA is the cancellation of the Contingent Share Award or CSA that took place in the second half of 2022. That was something that basically cost the company something about $70 to $75 million per year. The elimination of the
Speaker 2: coming years. The second level is that we basically kept head count largely flat, if not as likely down over the past, no six to 12 months. And that part I think is recurring. If you take a look at our overall cost base between 50 to 60% of our cost base is payroll loans.
Speaker 2: is payroll related and about 20% is technology related. We do expect that we will grow over the course of the next 18 months, the headcount, and a fraction of the velocity at which we grew headcount over the past 18 months. And is that sustainable? We believe this is sustainable, especially with the adoption of best in class processes and technologies.
Speaker 2: that will materially increase the efficiency and productivity of the company overall, as we have seen over the past 12 to 24 month period.
Speaker 10: Just to follow up here, Lago, it's very clear on the G&A expenses and about the market expenses. It's also, I mean, draw our attention, $19 million in the first Q this year. That was much higher, for example, last year and last quarter. T lords are XYZ.
Speaker 10: It is also, I mean, should we continue to see the bank with this lower level of marketing expenses and also just, I mean, it's a soft guidance that I'm asking here regarding the percentage of total operating expenses versus the total revenue. This quarter was a 25%. Do you think that it is, I mean, a reasonable level or that that should increase to capital gains?
Speaker 2: we have historically had a relatively low investment in marketing. But the 2022 numbers have also been maybe potentially inflated by the investments that we made in the World Cup, which we do not expect to see in 2023. So you should expect to see marketing being between 5% to 7% of our total operating expenses, as was the case in 2022, and as we expect to be the case
Speaker 9: the coming of the coming waters. All right, perfect. Thank you.
Speaker 6: And our next question comes from the line of Neha Agarwala from HSBC. Hi, thank you for taking my question. Mostly follow-ups on questions previously asked. So first on the cost. So the cost to income right now is about 36%. Do you see room for
Speaker 11: reducing it further in the short term or this is a good level at which you could operate and should this increase maybe as you get your licenses in Mexico, in Colombia, you launch more products in Mexico. Should we see...
Speaker 11: to income increase as the new geos will require more investments upfront and monetization is going to come with a lag. And my second question is on the high income segment. Your comments about having the highest NPS in the high income segment was a bit surprising because
Speaker 11: there are not a lot of products to offer for the high income segment. So what are we missing here? What are the main things which are allowing you to capture the high income segment in your view? Is it the ultraviolet card? Is it some other offerings that you have or just the experience? Because I would imagine the requirements for the high income segment.
Speaker 2: are much more broader. They require many more products, more personal attention. So if you can chat from right on that, that'd be great. Thank you so much. Great. Now let me try to take your first question on efficiency and then I'll ask Jack to help me with the question on high income.
Speaker 2: So on efficiency, we, as you said, reached the level of 39% on a combined basis. And if you take a look on page seven of the earnings presentation of 37% in Brazil only. So Brazil is not surprisingly more efficient than...
Speaker 2: than the consolidated basis. And we do expect that there is room for additional efficiency to be achieved in both Brazil and the consolidated basis. We don't expect that 37% in Brazil or 39% at a holding company is really kind of the best in class that we can achieve.
Speaker 2: Yes, I think Mexico and Colombia will have to increase its operations once they become fully regulated. In fact, Mexico has already become fully regulated and Colombia is expected to be fully regulated by the end of this year and we are preparing all of our sources accordingly. But I believe that the additional revenues that you're going to have in those countries
Speaker 2: will more than offset the additional cost and expenses that will have to be invested there in a matter that will not be detrimental to the overall efficiency ratio of the company. But that was the first question. I know that you also had a question on high income. Jack, would you share some thoughts there? Yeah, happy to. Thank you, Lago. Great question. And let me try to address it in a couple of steps. First of all, what we have found is that when we offer products...
Speaker 2: targeted at the high-income segment and as we optimize those we certainly see improvements in NPS as we measure them product by product from that high-income segment. We have seen that with our UltraVille as a credit card. We will expect to see that in the future as we launch more products targeted at that segment.
Speaker 2: about, for example, the consignato product for federal employees, which actually also tends to skew high income. So we'd expect that trend to continue as we go forward. The NPS measurements that we see today, however, are also related to the fact that our core products, whether it's our core Hoshino credit card product or bank account product, have
Speaker 2: features and ease of use and simplicity, transparency of pricing, all of these key pieces of our value proposition that resonate with high-income customers as well as the mass market. That combined with the investments we've always made historically in customer experience and customer service are what's leading to our NPS position with the high-income customers, just as it's leading to.
Speaker 2: our NPS position with other segments. As we increasingly focus our product development efforts to build products designed specifically for high-income customers, we expect NPS with them and our traction and principality with them to further increase, but it's still relatively early day.
Speaker 8: Hello guys, thank you for taking the question as well. First, for sure congrats on the print, very surprising, awesome top line. But my question, I guess, just to shift a little bit more into Mexico, like when I look at the operation in Mexico, we see basically all...
Speaker 8: I mean, both part members stabilizing, right? Around 650 million and 630 to 640 actually. And you didn't grow in the last month, like January , February , but provisions actually did come kind of a sooner phases before 20 million. So I guess my question is like, are you doing the same kind of...
Speaker 8: provisioning labels in Mexico for expected losses in which case you know growth should be the main driver for that expenses so that's kind of the first animal counting question and the second one is what's your thinking process in Mexico you plan on holding is a stable you know for how long what's the average duration of that portfolio to learn from that vintage before we accelerate thank you
Speaker 2: free and basically Mexico is beating Brazil across every single KPI that we have. We did grow credit cards and we did kind of see a fairly steep growth in customers over the coming over the last weeks, primarily after the launch of Nalguanta, new as we mentioned in this call that no.
Speaker 2: which over 500,000 customers. So we are super pleased with what we find in Mexico so far. Now, with respect to provisioning, number one, you will only see the expected credit loss provisioning in the consolidated books that we do. In the local books, you will see just Mexican Gap, you will not see the same IFRS.
Speaker 2: industry in the country usually presents this as 90 plus. So not entirely an apples to apples comparison. Now
Speaker 2: I think the underlying question may be what is the unit economics of the credit card in Mexico, what is the overall credit losses in Mexico and how do we expect this portfolio to behave and to unfold over the coming quarters.
Speaker 2: We do not expect the Mexico delinquency levels to be at par with Brazil, especially in the early days of the ramp up of this business for a few reasons. Number one, once we enter a country like we do in Mexico, we systematically launch a number of foundational tests that we basically test customer behavior and repayment profile across very different...
Speaker 2: And third, I think early stage cohorts usually have higher delinquency levels. Once they mature, their delinquency levels go down. So if you were to compare the delinquency levels of Mexico with delinquency of Mexico or Brazil, you will likely see higher levels now and probably higher levels even in the future. However.
Speaker 2: the unit economics of credit cards in Mexico are as compelling, if not more compelling than in Brazil. The return on assets and the return on equity that we expect to have for credit cards in Mexico are at par, if not higher than the one that we expect to have in Brazil. And then finally, as we basically earn more customers to Guantanamo and we get more customer principalities, data and deposits.
Speaker 8: we do expect to continue to ramp up credit cards in that country. Very clear level. But just like as we follow the monthly data in there, usually you would assume what about six months or more or less stable loan book and then you reaccelerate. If you were to get this on your expense in Brazil or something. Sorry, can you repeat the question Don? Yeah, yeah. No, just like the...
Speaker 2: cars in Mexico throughout the second quarter and throughout the third quarter of the year. We have by no means no slow down in Mexico and we expect to continue to increase our product penetration in the conference.
Speaker 2: Thank you. And our next question comes from the line of Craig from FT Partners.
Speaker 2: Thank you. And our next question comes from the line of Craig Murrer from FT Partners. Craig, your line is open.
Speaker 3: Thanks for taking the question. To follow up on the earlier questions on pursuing more high-end consumers, the question is, to what degree do you think your customer base now and in
Speaker 3: in the medium term will overlap with small business owners in Brazil? And how can you expand your product offerings?
Speaker 3: to cross over into the small business market. Hi Craig, David here, thank you for your question. So we actually have already a very significant base of small business owners. We have over 2.3 million S&P.
Speaker 3: would tell us that they were getting really, really bad service by traditional institutions in Brazil. So we saw an opportunity there and started cross-selling the small business product to them. These are the businesses that have a lot of potential. We probably haven't given it as much focus as we should, but we see significant growth ahead. We have still a very reduced
Speaker 3: for a portfolio where we have a savings account, detail account, and we're starting to roll out credit card product for small business owners. And we see really significant, really great product market fit. We've launched around also payments receiving. So overall, very excited about the opportunity there.
Speaker 3: portfolio where we have a savings account, detail account, and we're starting to roll out credit card product for small business owners. And we see really significant, really great product market fit with launching around also payments receiving so overall very excited about the opportunity there. Thank you for the answer.
Speaker 2: And this concludes the Q&A session of the call. I would like to thank you all for participating in this session today and learn more about our path of growth and profitability.
Speaker 2: I welcome you to access our investor relations website and follow up with us if there are any pending points. Thank you very much for being with us today. The new holdings conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.