Nu - Q2 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Welcome to Nu Holdings conference call to discuss the results for the second quarter of 2023. A slide presentation is accompanying today's webcast, which is available in Nu's Investor Relations website, www.investors.nu in English and www.investidores.nu in Portuguese. This conference is being recorded and the replay can also be accessed on the company's IR website. This call is also available in Portuguese. To access, you can press the globe icon on the lower right side of your Zoom screen and then choose to enter the Portuguese room. After that, select Mute Original Audio. Para acessar nossa conferência em português, clique no ícone do globo ao lado inferior direito da sua tela Zoom e selecione a opção Portuguese room. Ao acessar a nova sala, certifique-se de mutar o áudio original. Please be advised that all participants will be in listen-only mode.

You may submit online questions at any time today using the Q&A box on the webcast. I would now like to turn the call over to Mr. Jörg Friedemann, Investor Relations Officer at Nu Holdings. Mr. Friedemann, you may proceed.

Jörg Friedemann (Investor Relations Officer)

Thank you very much, operator. Thank you all for joining our earnings call today. If you have not seen our earnings release, a copy is posted in the Results Center section of our investor relations website. With me on today's call are David Vélez, our Founder, Chief Executive Officer, and Chairman, Youssef Lahrech, our President and Chief Operating Officer, and Guilherme Lago, our Chief Financial Officer. Throughout this conference call, we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for the company, but are not financial measures as defined by IFRS financial information... That is for FX-neutral basis.

David Vélez (Founder, CEO and Chairman)

Thank you, Jörg. Good evening, everyone, thank you for being with us today. Further decoupling from the other markets. In Q2 2023, once again, We continue to be extremely focused and committed to strong execution on our core priorities, while also maintaining significant investment on for future growth opportunities. Turning to the main highlights of the quarter, we continue to grow customers at a strong pace, ending the quarter with 83.7 million clients. Once again, posting very robust metrics at approximately 1.5 million customers per month. We also have some growth in Mexico and expect an acceleration in the coming quarters as Cuenta Nu continues to be rolled out. Most of the Cuenta Nu customers added this quarter still came via cross-selling from credit cards. Our business model continues to compound growth and profitability.

Revenues reached $1.9 billion in the 2Q, expanding 60% year-over-year. Our gross profit amounted to $782 million, a 113% year-over-year increase, while our gross margin expanded again to 42% this quarter, consolidating the recovery initiated last year. Sequential gross margin expansion, alongside ongoing efficiency improvements, drove a substantial increase in net income, which reached $224.9 million, or a 53% quarter-over-quarter growth rate. Adjusted net income reached $262.7 million, reflecting a 39% review of our recent financial performance for the past two years, demonstrating our capacity... By doubling the number of customers from 42 million in 2021 to 84 million at the end of the 2Q of 2022. Only two years on our FX-neutral basis.

A triple-digit revenue. The initial acceleration in net income growth, particularly evident in the chart on the right over the past three quarters. We expect this compounded effect to continue in the coming periods, offering a valuable combination of growth with enhanced profitability in our platform. As we have previously noted, Nu's inception in 2013 revolved around the concept of unbundling financial services. However, today, our most significant business opportunities lie in the rebundling of financial services by building a diversified multi-product, multi-segment, and multi-country portfolio of businesses. As shown in this slide, even our adjacent businesses have successfully garnered a million customers, demonstrating our remarkable cross-sell capacity.

As we will discuss ahead in this presentation, we believe other critical launches taking place this year will continue to help us earn the right to become primary banking providers of more and more customers, supporting our growth and profitability flywheel. Turning to our profitability, I'd like to highlight the evolution of the key financial metrics we presented over the past quarters. From this quarter on, we will focus only on the numbers of our holding company, as we understand that our Brazilian operations are already well understood. The momentum into the second quarter, as you can see by the numbers on this slide, as our model, where holding companies now translating its potential into profits. Nu Holdings recorded an impressive adjusted net income of $263 billion in the second quarter, representing an adjusted annualized ROE of 19%.

These current levels of profitability already position us on par with many traditional incumbent banks in the Latin American region, even though Mexico and Colombia are still in the early investing stages. Even more remarkable, we achieved these results while maintaining regulatory capital ratios of 20.2% in Brazil and 42.2% in Mexico, significantly above the minimum required of 10.5% in both countries. In addition to the capital in our subsidiaries, it's important to note that our excess cash in the holding level of $2.4 billion means that we're extremely well capitalized to deliver on our expected growth ahead.

Finally, it is important to emphasize that we're delivering these sound levels of profitability despite significant investments in future products and geographies, as well as our robust 60% year-on-year revenue growth rate, which few financial institutions at scale are able to show. I've seen once more, we're very excited with the momentum of the business. Now I'd like to pass it over to our CFO, Guilherme Lago, who will walk you through our numbers in detail. Go ahead, Lago. Thank you.

Guilherme Lago (CFO)

Thank you, David, and good evening, everyone. As David noted, we delivered another set of strong operating and financial KPIs, driven by our simple, powerful, value-generating formula. First, consistently growing our customer base across our three geos and rapidly converting them into active ones. Second, increasing average revenue per active customer or RPAC, by leveraging our cross-selling and upselling capabilities. Third, delivering sustainable growth while maintaining one of the lowest operating costs in the industry. Now, let's look at the second quarter results to see once more how well these three elements keep generating value. Starting with our customer base, which expanded by 28% year-on-year as we added 4.6 million new customers, reaching a total of 83.7 million customers at quarter-end.

In Brazil, monthly net adds continue at a level of about 1.5 million customers, achieved mainly through organic channels with very low customer acquisition costs. We are now the fourth largest financial institution in the country in number of customers, according to the Brazilian Central Bank. As noted in our prior call, we have been achieving faster and sustained growth rates in Mexico since the launch of our digital savings account, Cuenta Nu. We have reached the mark of more than 1 million customers less than 1 month after its launch in May of this year. In Colombia, we already have 700,000 customers. We expect to grow even more after the launch of our savings account in the country, planned for the end of this year.

Active customers increased 32% year-over-year, with the monthly activity rate posting another consecutive quarterly increase, reaching 82.2%, up from 80.2% a year ago. We believe this positive outcome speaks to Nu's ability to continue growing our ecosystem while driving higher customer engagement. Moving to our second pillar, which is revenue expansion. As shown on the left chart, nearly 60% of our active customers are already primary banking relationship customers, which represents the percentage of our active customers who transfer out over 50% of their post-tax income on a monthly basis. In general, the more customers use Nu as their primary bank, the greater the number of products they use, driving successive increases in the monthly RPAC they generate....

The second chart is our product cross-sell chart, which shows how we have accelerated the pace at which our customers use our products. As we launch new products, we are successfully cross-selling them to our customer base and earning the right to become their primary bank. Lastly, the third chart is our RPAC chart. The more we engage our customers, and the faster we increase our cross-sell and upsell capabilities, the more sustainable the monetization of our expanding customer base becomes. This effect can be observed again this quarter, as our monthly RPAC reached a new high of $9.3. The monthly RPAC of our more mature cohorts are already at $24. Higher RPAC led to another quarter of solid revenue growth, as shown in the next slide. Monthly RPAC continued its steady sequential growth trend, expanding 18% year-over-year on an FX-neutral basis.

We are confident that there is still untapped potential for further RPAC growth, bringing us closer to realizing our full RPAC potential. RPAC growth, along with sustained expansion of our customer base, resulted in a 60% year-over-year increase in revenue on an FX-neutral basis, reaching a new record high of $1.9 billion. Moving to our cards business, purchase volumes increased to $26.3 billion, up 30% year-over-year on an FX-neutral basis. Growth was mainly driven by successful product upsell and cross-sell strategies, along with higher customer engagement. The right-hand chart displays how purchase volumes increase as cohorts age. Older cohorts consistently purchase higher volumes. It's worth highlighting that newer cohorts appear to grow more slowly than more mature cohorts due to two factors.

Number one, a disparity in scale, as these newer cohorts account for almost 20x more customers than older cohorts. Number two, newer cohorts have, at least initially, a lower credit card penetration using debit only, which usually implies lower ticket sizes. Our market share in terms of purchase volume is at approximately 13.9% of the industry's total, with debit cards at 14.5% and credit cards at 13.6%. We are confident that we can further increase our shares in the future, given our steady new customer acquisition and the maturation of their relationships with us. Our consumer finance portfolio, composed of credit cards and personal loans, reached $14.8 billion, up 48% year-over-year.

Total credit card loans maintained their growth trend, increasing 54% year-over-year to $12 billion, as we continue to add new customers to our ecosystem while keeping our low-and-grow credit expansion approach. The highlight this quarter is the lending portfolio, which increased 33% year-over-year to $2.8 billion. Lending cohorts continue to perform better than expected, giving us the confidence to increase originations once again. Let's now move on to the breakdown of interest-earning loans in our credit card portfolio. As we have previously discussed in our earnings calls, our focus remains on increasing the share of interest-earning credit card loans. Our interest-earning installment balance continued to expand, and now makes up a record high 19% of our total credit card loan book. Conversely, revolving receivables was kept at 7% of total credit card receivables for the fourth consecutive quarter.

We believe interest-earning installments have attractive risk-adjusted rates of returns that allow us to further monetize our credit card business. As our lending portfolio continues to show strong resilience and a better-than-expected performance, we have once again increased our risk appetite and origination levels. This quarter, loan origination was up 53% year-over-year to BRL 7.3 billion. The performance of our personal loans cohort improved over the last several months, giving us the conviction necessary to increase loan originations. As our portfolio continues to show strong credit resilience, we progressively grow within our risk appetite, seeking to deploy capital profitably and consistently. The launch of public payroll lending complements this strategy and reinforces the opportunities for growth we have ahead. We are confident in our ability to continue to drive attractive growth in lending.

This belief is supported by our large customer portfolio, our best-in-class underwriting platform, our strong capital base, and our ample liquidity position. Moving on to funding. Total deposits expanded 23% year-over-year to $18 billion this quarter, as we advance on our goal of building a robust local currency retail deposit franchise to fund the majority of our consumer finance operations. Our loan to deposit ratio increased to 35%, up from 33% last quarter, as we continue to optimize our balance sheet. In line with our expectations, our cost of funding in Brazil was at 80% of the interbank deposit rate in the country, demonstrating our progress in leveraging the value of our robust liability franchise. Just 1 month after the public launch of Cuenta Nu in Mexico, it hit an impressive milestone of 1 million customers.

At the close of the second quarter of 2023, Cuenta Nu accounted for 1.3 million customers and received total deposits of more than MXN 1.5 billion, equivalent to $90 million, with a cost of funding lower than 80% of TIIE, the local interbank rate, and significantly below our current cost of funding in Mexico. We believe our value proposition has been well received, leading to a steady increase in new customers each month. This has contributed to further strengthen our deposit franchise in Latin America. We believe the combination of the continued growth of our credit card and lending portfolios, together with the improvement of our funding cost, have contributed to the expansion of our net interest income, or NII, and our net interest margins, or NIM, to new record high levels.

Our NII gained another digit this quarter, reaching $1 billion, which represents yet another strong growth of 133% year-over-year, resulting in an increase of 260 basis points in our net interest margin quarter-over-quarter. Now, focusing on the last pillar of our strategy: maintaining a low cost to serve. We strongly believe that one of our platform's most relevant competitive advantages is low cost to serve. In the second quarter of 2023, our cost to serve per active customer remained unchanged year-over-year at $0.80, while RPAC increased by 18%, underscoring the strong operating leverage of our business model.

As we stated in prior quarters, our aim is to keep our cost to serve at or below the $1 level, as we believe our scale provides us with significant operating leverage and bargaining power with our suppliers. Moving down the P&L, gross profit reached a quarterly record high of $782 million, up 113% year-over-year. Our gross profit margin reached 41.8%, more than 10 percentage points higher year-over-year, consolidating the acceleration in the pace of expansion it started in the third quarter of 2022. We were able to achieve this result despite the fact that we had a higher level of provisions in this quarter, resulting from the expansion of the originations of our lending portfolio as we upfront credit loss provisions. Operating leverage is a key element of our strategy.

By further increasing revenues and maintaining a low-cost operating platform, we have boosted profitability. As shown on this chart, we have improved our efficiency ratio over time. In the second quarter, it reached another all-time low of 35.4%, or 29.2%, excluding share-based compensation, improving for the sixth consecutive quarter. This level of efficiency already ranks Nu Holdings as one of the most efficient companies in Latin America. We expect to capture additional operating leverage as our scale increases through the continued expansion of our customer base, the upsell and cross-sell of our products, and the launch of new features, together with improved results in our new geos of Mexico and Colombia, which still operate with losses. Lastly, we continue to drive increased profitability, delivering adjusted net income of $263 million and net income of $225 million.

These positive results confirm the effectiveness of our strategy and business model. While we are very pleased with the results we have achieved so far, let me reinforce that we manage our business with a view towards long-term value creation. This can require additional investments in the short term, aimed at unlocking long-term value creation opportunities. To conclude the review of our performance this quarter, let me recap the sustainable advantages across our four cost pillars. Number One, on cost to acquire, we added almost 5 million customers in the quarter, while maintaining one of the lowest customer acquisition costs among consumer fintechs and banks globally. Number Two, on cost to serve, our cost to serve remained below the $1 level, which we estimate as being 85% lower than those of incumbents.

Number three, on cost of risk, we successfully managed the risk of our consumer finance portfolio, amid a very challenging backdrop, and continue to outperform competitors when comparing apples to apples. Youssef will provide more details on this topic shortly. Number four, on cost of funding, we maintain our cost of funding at the level of 80% of CDI.

as we began to unlock the potential of our retail deposits franchise, closing the negative gap we had against incumbent banks, and widening the positive gap against consumer fintechs. We are very excited about what we achieved this quarter, and we are confident in our ability to develop and scale best-in-class products, expand internationally, and continue to operate at low costs. Now I'd like to turn the call over to Youssef, our President and Chief Operating Officer, who will walk you through some of the highlights of our asset quality.

Youssef Lahrech (President and COO)

Thank you, Lago, and good evening to you all. Once again, let me take you through some of the key indicators of asset quality and credit portfolio health for the second quarter of 2023. Let's start with the NPL trends. Overall, our leading indicator, NPL 16-90, improved slightly over the last quarter, decreasing by 10 basis points to 4.3%, in line with our expectations. Part of that drop was driven by the improvement in the performance of our personal loan cohorts, as mentioned earlier. The 90+ NPL ratio increased as expected from 5.5%-5.9%. As in past quarters, this continues to be driven by the stacking behavior of loans moving through the delinquency buckets, as 90+ is more of a stock rather than a flow metric.

Like in past quarters, we did not sell any credit receivables, which would have otherwise artificially decreased NPL rates by virtue of the purging effect of asset sales. Renegotiations, for their part, remained at around 9% of the book this quarter, and nearly half of those renegotiations came from loans that were current and not past due at the time of renegotiation. Turning to the performance of our credit card portfolio against the industry, this slide shows the time series of NPLs by income band, with the purple lines representing Nu, and the gray lines representing the industry. We continue to see our NPLs outperforming the industry on a like-for-like basis, and for lower income bands, our comparative advantage remains even more pronounced. Similar to prior quarters, our provisions increased, primarily driven by the growth in our portfolio.

Remember that we front-load provisions when we originate loans based on the expected losses for the life of the credit and in accordance with IFRS 9's expected loss methodology. The increase in provisions, therefore, is directly linked to the higher loan origination volumes recorded in the quarter. Our risk-adjusted net interest margin reached another record high of 8%, expanding by 140 basis points quarter-over-quarter, and 570 basis points higher than a year ago. Having shared these data and perspectives on credit and asset quality, let me now turn the call back to our founder and CEO, David Vélez, for his concluding remarks. David, back to you.

David Vélez (Founder, CEO and Chairman)

Thanks, Youssef. As we wrap up, I would like to talk about two relevant product launches that took place during recent months: secured loans in Brazil and Cuenta Nu in Mexico. We consider these two products as essential additions to our roadmap for both countries, given the relevance for us to grow our business and earn the right to become the primary banking relationships of more and more customers. Regarding secured loans, we officially launched payroll loans for federal employees in April and started the testing phase of FGTS-backed loans a few weeks ago. Including payroll loans in our roadmap is going to be essential for several reasons. First and foremost, we believe it gives us access to the largest asset class for consumer lending in Brazil, amounting to over BRL 600 billion.

Currently, more than 35% of this market is already taken by Nubank's clients, but through other banks. Second, we believe that offering payroll loans, and now also FGTS-backed loans, is crucial for us to establish primary banking relationships with an increasing number of customers that tend to be high income. It serves as the ideal product for those that are eligible, enhancing our engagement with them. Importantly, in these new lines of products, we have decided to price aggressively, given the advantages of our business model efficiency and the fact that we're not going through intermediaries. Lastly, incorporating secure loans into our portfolio is valuable to the remarkably low level of effective losses associated with this product. We believe these initiatives will help us complement, balance, and fortify our unsecured credit portfolio with lower risk offers.

We're already living with all of these secure credit products, but still in testing mode with relatively small sample sizes. While we're still in the early days, we're on track with our expectations. The conversion rate is progressing nicely, which can be attributed to our differentiated UX and attractive pricing. By eliminating loan brokers from the process, we have passed on some of the associated benefits to our final borrowers. In addition, the current level of losses for payroll loans has been better than our initial expectations. With a well-established position in payroll loans in Brazil, we seek to earn the right to become primary banking providers of more and more customers in the future. Regarding Cuenta Nu, we officially launched it in May, and within a month, crossed the 1 million customer milestone in this product in Mexico.

By the end of June, we reached 1.3 million accounts and collected more than MXN 1.5 billion in deposits. Just for the sake of comparison, the average deposit per customer in Mexico is more than 10x the average of Brazilian customers' deposits when our checking account was launched in the country in 2017. Cuenta Nu plays a pivotal role in our roadmap for Mexico based on three key factors: diversifying funding sources and reducing costs. The Latin markets are highly concentrated, making it challenging to rely solely on wholesale funding, as competitors may not be willing to fund our growth. Additionally, securitization products are usually shallow in Latin American markets, and they often become inaccessible when needed the most.

We believe that to grow our consumer finance business in LATAM, we need to develop local currency retail deposits to provide a stable and sustainable funding source. Today, with an effective yield lower than 80% of their risk-free rate, and as mentioned before, significantly below our current cost of funding in Mexico of funding rates plus 100 basis points, which means more than 12% per year. Accelerating customer growth. Cuenta Nu has the potential to unlock our referral flywheel, resulting in accelerated customer growth. Until the end of Q1 2023, we could only onboard customers who met our credit card threshold, leading to a high decline ratio of approximately 70% of applications. Now, with Cuenta Nu in place, we have the opportunity to onboard 100% of applicants without necessarily incurring additional credit risk. Finally, data-driven credit underwriting.

Since our credit underwriting engine is built on AI and machine learning, making it crucial to have sufficient data scalability, the faster we grow our customer base, the more refined and accurate our credit assessment becomes, strengthening our risk management practices and supporting responsible lending. Notwithstanding the fact that the maturation curve of new products usually take a year, we could not be more optimistic about the future, given not only our early progress in these new launches, but also the upcoming additions planned for the second half, which include, to name only a few, payroll loan portability and refinancing, INSS payroll loans, FGTS lending, and Cuenta Nu in Colombia. We have repeatedly stated, together with our customer attraction and cost differentiation, superior products and services foster our cross-sell and upsell capabilities, which are essential for our business model, supporting retention, loyalty, growth, and profitability.

With that, we would like to take your questions now. Thank you very much.

Operator (participant)

We will now start the Q&A session for investors and analysts. If you wish to ask a question, please press the Reaction button and then click on Raise Your Hand. If your question is answered, you can exit the queue by clicking on Put Your Hand Down. Please limit yourself to one question and a follow-up. If you have further questions, please reenter the queue. You may submit online questions at any time today using the Q&A box on the webcast. I would like to turn the call over to Mr. Jörg Friedemann, investor relations officer.

Jörg Friedemann (Investor Relations Officer)

Thank you, operator. Our first question comes from the line of Tito Labarta, Goldman Sachs.

Tito Labarta (Equity Analyst)

Hi, good evening, everyone. Thank you for the call and taking my question, and congratulations on another strong quarter. I guess my question is on, on the level of provisioning, you know, you know, good loan growth, and I know the, the loan growth drives a lot of the provisioning, but just to think about it, you know, early NPLs showed a slight improvement there. We've kind of seen that across the industry. Just to think about when provisioning can be-- start to maybe become a tailwind, right? I mean, your gross margin did improve in the quarter, despite that, but you mentioned in the past, I think, gross margins can eventually get to, you know, 60% level or so, I know when you're much more mature.

If, if the credit outlook is improving, can, can that potentially be a tailwind, in the foreseeable future?

Youssef Lahrech (President and COO)

Hi, Tito. This is Youssef. Thanks for the question. Look, you know, we don't provide guidance on credit quality or delinquencies or consequently provisioning from a forward-looking perspective. I mean, you can take a look at how the coverage ratios have trended in the appendix of our earnings presentation, page 33, I believe. You know, from a coverage of 90+, it's been fairly stable, around 213-214%. The coverage of balance generally mirrors NPL 90+, and it has been largely performing per expectations. To your point, you know, should delinquencies improve, obviously provisions can become a tailwind, but, you know, we'll see actual performance as it comes in.

Tito Labarta (Equity Analyst)

Great. Thanks, Youssef. If I could follow up, I guess, just a little bit on, on the loan growth, in particular, you know, David, you highlighted, you know, payroll loans have now launched. You know, I think, any just initial color on how it's tracking and if that can be significant in the second half of the year, or is that more, will take a little bit longer? Because that could also be another potential tailwind to, to that cost of risk, given just the, the, the risks on the payroll loans are a lot lower.

David Vélez (Founder, CEO and Chairman)

Hi, Tito. Yeah, no, absolutely. We had to integrate a number of different contracts to launch payroll loans. We did that already. We're up and running on Q2. We've been iterating the product, making sure it's a great product for consumers, easy to understand. We're getting comfortable more and more with the type of feedback we are receiving, and I think you'll start seeing us increasing the pace of originations over the next few quarters, if everything goes according to plan. But yeah, I mean, I think over the next few quarters, you should start seeing meaningful demand. Again, this is the largest profit pool in financial services in Brazil, so very large market. As we've said in the past, our customer base accounts for something like 35% of that entire profit pool.

We are, we have a great product, going directly to consumers, and we're pricing very effectively. Interest rates are 30%-40% below market. We think we have very good value proposition that should allow us to take significant share in this market. Again, we'll have to take step by step and, and, and see how those go as we start rolling it out to the entire customer base.

Guilherme Lago (CFO)

Chito, if I may, if I may complement here, a few thoughts on payroll loans. We have launched now SIAPE as a pilot test. In the second half of the year, we're gonna launch INSS and portability. I highlight portability because in a declining interest rate environment, the ability to actually port loans from other banks may be a relevant source of growth for us, and it's something that we intend to lean in heavily over the coming quarters. Having said that, I do not expect that payroll loans will actually move the needle that much in terms of, you know, PNL and loan balance in 2023. I think it is more something for 2024 and beyond.

Tito Labarta (Equity Analyst)

That's great. thank- thanks, David, Lago, Youssef, and Jörg, and congrats again on the great quarter.

Operator (participant)

Our next question comes from the line of Pedro Leduc, Itaú.

Pedro Leduc (Partner and Equity Research Analyst)

Thanks, guys, and congrats. Good evening, everybody. One on service revenues. Great job there as well. I think interchange seems to have been flattish, you know, despite the caps, to confirm how you guys see that one going forward as well. You mentioned credit appetite slowly, you know, there as well. On the second part, on funding costs, a surge in deposits, very nice to see, at very stable costs. Now, on the grounds, we see you guys looking for longer term instruments that would cost more than 80% of the CDI. You know, just...

Of course, there's other ways to keep it cheap, but, just, give us some color how you're seeing that going forward, you know, the, the interest, or the liabilities, cost of funding mix, given that it's changing a little bit. Thank you.

Guilherme Lago (CFO)

Hi, Pedro, this is Lago. Thanks so much for your question. I do believe that we will progressively increase the duration of our liabilities as we increase the duration of our assets. We will continue to actually match very well our asset liability book. However, we believe that we could do so still with a very healthy balance of short-term deposits at relatively low cost of funding at around 80% of CDI, and we can entertain other pockets of liquidity in the Brazilian and international markets that would allow us to increase the duration of our liability. We have now recently started to issue longer dated time deposits in our platforms, and we have been very pleased with the results.

I would basically separate. We have the short-term deposits that we believe will continue to grow at 80% of CDI average cost. We have other pockets of liquidity that will be more than sufficient to provide us with adequate asset liability management as we scale progressively, primarily the book of our secure lending Consignado business.

Pedro Leduc (Partner and Equity Research Analyst)

Great. Thank you. May I do a follow-up as well?

Guilherme Lago (CFO)

Yeah, absolutely.

Pedro Leduc (Partner and Equity Research Analyst)

Yeah. All right. When I look at your credit balance, you know, very nice portion of the interest bearing and growing. Then when I look within, the credit card composition, the revolver, you know, the rotativos, are, are basically flat Q-on-Q in, in reais, while the others, you know, especially interest with installments grow. It's a very nice achievement, especially given all the discussions surrounding this, this line or the revolver. You can elaborate with us and share some light on how you've been able to grow the others, keep that one sort of flat despite the growing TPVs? That'll be great. Thank you.

David Vélez (Founder, CEO and Chairman)

Sure, Pedro, here's David Vélez. We, from the very beginning, built a strategy in credit card to focus on transectors. We never loved the revolving business for the reasons that you know very well, which is a market that has a number of different complexities across the chain and ultimately forces issuers to charge very high interest rates. We never liked that. We decided to build, since the beginning, a model that look for transectors. If we could have Since the beginning, if we could have a model that had 100% transector, 0% revolvers, we would choose that. We would make, we would effectively make money only on interchange. However, it's, it's impossible. The models are not perfect, you end up having a percentage of revolvers.

They are kept to effectively the minimum, and customers that come in and are effectively have a high probability of revolve, we wouldn't accept them to be a credit card holder. That's why you see us having such a smaller percentage of revolver of 7% versus the average market at 16%. We see that there are other opportunities to use financing that is good for the customer, where there is real price elasticity, and we can price at a much lower interest rates.

Specifically in our case, Pix financing over the past few quarters has been a great avenue where we allow customers to finance their purchases over a number of installments at lower, much lower interest rates, creating this portfolio of much longer dated, lower delinquency, lower interest type of portfolio, which is ultimately much healthier for us and much better for customers. That is, that is effectively the part that we wanna grow.

Guilherme Lago (CFO)

That is what you effectively see in the slide 14, where you see us growing, that, that kind of intra balances from 8 to 19%, while trying to maintain revolver to its minimum.

Pedro Leduc (Partner and Equity Research Analyst)

Super, David. Thank you.

Guilherme Lago (CFO)

Thank you.

Operator (participant)

Our next question comes from the line of Eduardo Rosman, BTG Pactual.

Eduardo Rosman (Managing Director and Senior Equity Research Analyst)

Hi. Hi, everyone. Congrats on the numbers. I have a question related to the revolving credit card theme and, and these potential changes in parcelados. What, what's your take on that? Should we expect something relevant to happen? If there's a cap, shouldn't this be an opportunity for Nu, given its much lower cost to serve? You also just mentioned that you have less revolving than peers, so any color here would be, would be great. Thanks.

Guilherme Lago (CFO)

Rosman, this is Lago. Thanks, thanks for your question. The discussions around the economics of credit card in Brazil have been going on for years, and they have certainly intensified over the past, now, few, few months, involving both the government and many, many credit card issuers. Those discussions are not simple, because the topic is really highly complex. As you know, credit card represents a very big industry in Brazil. It accounts for about 40% of the personal consumption expenditure, or PCE, of the country, and over 20% of the GDP of Brazil. In 2022, the purchase volume of credit cards accounted for over 2 trillion reais. It's a very important, very large industry, and any drastic or material changes to its dynamics may have fairly, no relevant and material consequences to the economic output.

I think all of the industry participants, the government, and the regulators are fully aware of this. We are very confident that the industry will provide an adequate solution that we even evolve and further the product in a better, in a better equilibrium. I think it is very hard for us, Rosman, at this point in time, to draw any high conviction outlook as to what is gonna happen over the next few weeks or, or, or, or months. We do not expect any drastic changes in the unit economics, nor do we actually believe that interest rate cap will be welcomed by many of the industry participants or the regulators, given the material negative impact that it may have to the credit availability.

Eduardo Rosman (Managing Director and Senior Equity Research Analyst)

No, great, Lago. Thanks a lot.

Operator (participant)

Our next question comes from the line of Yuri Fernandes, J.P. Morgan.

Yuri Fernandes (Executive Director and Equity Research Analyst)

Hello, everybody. Congrats for another very good quarter. I have one question regarding Brazil, the profitability. I understood that the focus should be the holding, but when we look to the earnings from Brazil, Brazil was maybe $190 million. It's, it's a good increase from previous quarter, $20 million. Now we see more increasing maybe other markets or maybe the holding. Just wanna check this, what is the difference between the $225 million you printed in the holding and Brazil, that in the previous quarters was over of the profitability of the company? Just checking if it's the cash at the holding, at higher rates, something like that. Thank you.

Guilherme Lago (CFO)

Yuri, thanks, thanks for the question. I think two, two comments here. One, I would be very cautious of, you know, drawing conclusions on the profitability of our Brazilian operations by looking only at the figures that we provide to the Brazilian Central Bank, because these figures, they account only for our legal entities that are fully regulated in Brazil. They do not account for 100% of our operations in the country. I wouldn't necessarily draw much from what is reported in the Brazilian Central Bank. Your second question, though, is, it's intuitively, yes. I think the way that we operate, we have now profitable operations in Brazil. We have profitable operations at the holding company, largely as a result of the investment of the $2.4 billion of cash that we have there.

We have operations in Mexico and Colombia that are still, now, posting losses as they are in high growth investment situations.

Yuri Fernandes (Executive Director and Equity Research Analyst)

No, thank you, Lago. I was using your presentation, I, I guess you still have Brazil out there, and I was using... I, I know it's very similar to the report by Central Bank, but I guess it still have the consolidated earnings there. If I may, Lago, just a second follow-up here. Higher income clients, how relevant is this for your strategy here for the bank? Because you, you, you kind of have a very good share on lower income and middle income. This is a common topic we discuss with investors, so would love to hear your thoughts about higher income clients. Thank you.

Guilherme Lago (CFO)

No, absolutely. Look, the high-income, venturing into the high-income sector is one of the company's priorities for the 2023, 2024 period. We have invested, you know, a good amount of time and resources trying to understand globally how companies have succeeded breaking into the high-income segments in many parts of the globe. We have basically crafted a strategy that is composed by two steps. One step is customer acquisition, the second step is customer monetization. I think in the first step, which is customer acquisition, when we look at the past, 18 months, we are fairly well pleased with how many high-income customers we have acquired in the country.

If you define a high-income customer as a customer who earns more than 12,000 reais, we already have over 60% of the high-income customers of Brazil being customers of Nubank. I think the first step of this two-step strategy has been.

David Vélez (Founder, CEO and Chairman)

No, very successful so far. We are now entering into the second stage, which is to deepen the relationship of those customers and to be able to increase our share of wallet of them. If you compare the demographics of the customer base of Nubank with the customer base of incumbent banks, you see that in terms of number of customers, we have a relatively similar breakdown between low income, middle income, and high income. Our share of wallet in the low income and middle income is still much higher than our share of wallet in the high income, and there lies the huge opportunity that we have to grow customer monetization in Brazil over the coming one or two years. Yuri, the growth into any new kind of demographic or segments, it's not a sprint, it's a marathon.

By which I mean, it's not something that we're gonna be able to show results in one quarters, two quarters. I think it is a matter of a few years in which we will strengthen our value proposition and progressively grow into this new segment.

Yuri Fernandes (Executive Director and Equity Research Analyst)

Perfect. Thank you. Congrats again on the quarter.

David Vélez (Founder, CEO and Chairman)

Thanks, Yuri.

Operator (participant)

Our next question comes from the line of Thiago Batista, UBS.

Thiago Batista (Equity Research Analyst)

Hi, guys. Congratulations for the results, very strong results. My question is about the good surprise of the ROE of 17% that you guys posted this, this quarter. Even with excess capital and also with losses in Mexico and Colombia, this level is already higher than most of the incumbents in Brazil, in line with Itaú Unibanco retail business, and seems that Nubank has a structural better efficiency ratio than peers. My question is: how do you believe Nu will play the superior efficiency in the long term? The bank should deliver or the fintech should deliver a much higher ROE than peers, or part of this will be shared with clients and consequently, Nu tend to have a much lower price than peers.

How you guys are likely to play with this superior efficiency versus peers?

David Vélez (Founder, CEO and Chairman)

Yeah, no, great question. I think it, it, it talks to the heart of the digital banking strategy we've been pursuing since the very beginning, which, you know, similarly to what you've seen, when you have technology companies, fully digital technology companies, competing with traditional companies that are more offline operations, we have the opportunity to use the efficiency of our business model, that now you can start really seeing, especially around the operating efficiency, on behalf of our customers, so that we provide a product that has higher quality at lower cost, allowing us to win more share. You start creating a bit of a flywheel where you gain share, you gain scale, that scale gives you lower cost to serve.

You then go back and pass that efficiency again to the customer via better products and even lower pricing, and you have this, you know, reinforcing flywheel. We expect to do that in banking. We Part of our initial value proposition was charge zero fees. Even since the beginning, we started already charging no fees on that side, and that meant an opportunity to compete on price. As we grow and we get more data and our models mature and our cost of cost to serve decreases even lower, we can then start doing both lower fees and lower prices in credit products. Specifically to your question, we think we're gonna be doing both.

We will use the advantage of the business model to both gain share, as well as ultimately see a higher return on equity than traditional incumbents, given ultimately this cost structure advantage is very strategic, and it's gonna be hard for competitors to match that cost structure advantage in a short period of time.

Thiago Batista (Equity Research Analyst)

No, very clear. If I can do a follow, a follow-up? My follow-up would be regarding the artificial intelligence. If you guys are already using this, and on where this should improve the bank's operations. It will be more on the cost, more on the asset quality? How this should improve the operations of the bank?

David Vélez (Founder, CEO and Chairman)

Yes. We've been actively active users of artificial intelligence already for a while. We've also been investing a lot in understanding how specifically large language models can have different applications for us. We think there's really application everywhere, from obvious uses around providing better customer service at lower cost, so cost efficiency, to even applications around fraud, anti-money laundering, and defense. We're getting very excited about the type of application that we can see there. Especially also on the consumer-facing front, so reinventing the user experience for consumers. One way that we've talked in the past is that when we started the company, we saw the smartphone as a way to put a bank in every consumer's back pocket.

We think AI is gonna be the opportunity to put a bank and a banker in every consumer's back pocket. That is going to really be the enabler of democratizing access to best financial services products to the 95% of the population that, even today, don't have great access to the best products. We're big believers on the different avenues of opportunity that this technology opens up, both on the offense, both on the user experience, as well as a lever to increase even more efficiency of the model. Thanks, and congratulations again. Thank you.

Operator (participant)

Our next question comes from the line of Jeff Elliott, Autonomous.

Geoffrey Elliott (Senior Equity Research Analyst)

Hello. Thanks very much for taking the question. I, I wanted to ask about Mexico. Clearly, quite a different credit card market from Brazil, and I imagine the revolving part of the business is much more important there, given the different economics. How are you seeing credit in Mexico? Can you give us a feel for how credit quality has been performing? Maybe a sense of how what you've seen there compares with Brazil. Thank you.

Youssef Lahrech (President and COO)

Hi, Jeff, this is Youssef. Thank you for the question. Yeah, y-you're right, there are some important structural differences in terms of the credit card product in Mexico, how customers view it and use it. It tends to be much more of a borrowing vehicle, rather than a payment vehicle, which tends to be the, the predominant use in Brazil. Consequently, you see a couple of things. You see higher interest bearing receivables, you see higher risk as well. On net, you know, returns are actually comparable, if not, if not better than in Brazil.

Maybe the other salient thing that I would point out with respect to Mexico is the levels of penetration of financial services in general, and credit cards in particular, are much lower than in Brazil. That will lead to much more of a, you know, financial inclusion play, and consequently, just higher levels of delinquency. You know, we've been very pleased with what we've seen in Mexico in terms of the traction we've gotten in the market since our entry about three years ago.

You know, closing in on 4 million customers, now having launched our second product, we think, the launch of Cuenta Nu is gonna be a game changer in terms of being able to approve everybody as a customer, in terms of gathering data, in terms of building, you know, ultimately principality and higher levels of engagement. We're, you know, we're quite pleased with the traction so far.

David Vélez (Founder, CEO and Chairman)

The one point I would add, Jeff, on Mexico also, is that the fact that Mexico, and also then later Colombia, is more of an unbanked story versus a bank story, which was Brazil, creates both a challenge as well as an opportunity. A challenge, obviously, because we have to underwrite as we grow to a percentage of the population that never had access to credit, which means at times we're gonna have to slow down a bit, retreat, read our model, accelerate a bit, pause, and we're totally comfortable with doing that. That's what we-- that's how we built our models in Brazil, you know, we tend to accelerate, we create a, put a new model into production, we test a number of different alternatives. We'll have to do a little bit...

We'll have to be a little bit more careful as we go into this new territory, but it's on a great opportunity, because if we crack the code, then we really are the only one in the market that knows how to underwrite 88% of the entire population. The traditional banks have been there for decades, and they haven't done it. They've continued to provide credit cards to a 12% of the population that already have credit cards. You only get a credit card if you have a credit card. It's the safest, lowest risk strategy, obviously, but there is no real differentiation there.

We'll take our time, and you see us accelerating and pausing at times, but ultimately, we think it's a really exciting market because we can build a real moat in how to underwrite and provide credit to effectively the majority of the entire country.

Geoffrey Elliott (Senior Equity Research Analyst)

Great. Thanks very much.

Operator (participant)

Our next question comes from the line of Flávio Yoshida at Bank of America.

Flávio Yoshida (Equity Research Analyst)

Hi, everyone. Congrats on the results. My first question is, is on payroll loans. I was wondering if you guys could share some details of the evolution under the SIAPE operation. Is it coming better than expected, or are the main challenges faced so far? How should we think about the overall NIM and ROE for Nubank going forward, given the fact that payroll loans should have a greater, greater relevance on the total portfolio, especially taking into consideration that payroll loans interest rates are lower than cards and personal loans as well?

Guilherme Lago (CFO)

Flávio, thanks. Thank you for your questions. We have launched what we, I would say, is a partial launch of our Consignado business in Brazil, in a way that we started in late April by launching only the SIAPE product, but still without portability, right? I think the main features that we're gonna be adding in the second half of the year are fairly important for us to be able to ramp up the product, mainly the portability of SIAPE plus INSS plus FGTS. I think with those three asset classes, we will have on our shelf, products that represent the book of the secure credit market in Brazil, which is the single largest targetable addressable market in, in the country. We are super encouraged with the early results.

What we have seen so far since we started to operate with Consignado back in, in April, as I mentioned, is fairly strong signs of product-market fit. Customers love the product, conversion has been better than expected, we have been able to have lower than expected operational losses fraud. We like what we find so far, but it's too early to call kind of a victory on this. It's gonna be a longer journey. We don't expect that Consignado or FGTS will move the needle in 2023 in terms of loan originations or loan balance, but it will be fairly important for us for the next, now, 3 to 5 years, as it represents the largest market in Brazil.

Now, it will, as you correctly pointed out, involve lower net interest margins, which is the essence of the payroll loan business in Brazil. However, it will not necessarily come with much lower ROEs, because it also draws less regulatory capital, and we are confident that given our cost structure, we will be able to deliver growth, lower prices to consumer, and still very compelling levels of ROEs. I think we've mentioned in the prior calls that we are aiming at having ROEs of about 30% of our loan book, and we do expect that the combination of all of these products will be able to deliver on that.

Flávio Yoshida (Equity Research Analyst)

Okay. Thanks for the very complete answer. My second question is a follow-up on, on Yuri's question. This was the first quarter that we saw a positive result for the holding company, without Brazil. I was wondering if there was any change on the investment strategy, and if we should expect further positive results in the coming quarters?

Guilherme Lago (CFO)

No, I think, what we have seen is a, is a, slightly better result, you know, or, you know, treasury operations at the holding company, given the $2.4 billion-$2.5 billion that we have there. Mostly as a result of the more benign markets that we have, our investment policy at the holding company has been fairly conservative, and we expect to continue to be fairly conservative, investing in basically, very safe and liquid investment assets.

Flávio Yoshida (Equity Research Analyst)

Okay, thanks a lot.

Operator (participant)

Our next question comes from the line of Rafael Frade, Citi.

Rafael Frade (Equity Research Analyst)

Hi, everybody. Good evening, and congrats on the, on the numbers. I have a question only related to capital. I understand that, now you are at... For the third quarter, you should already have, all, all the regulated entities in Brazil under the same umbrella in terms of capital. Just to, to have a sense of what would be your Basel, at, at the current, in, in, in this current configuration?

Guilherme Lago (CFO)

Yeah, Frade, thanks so much for your question. Just for the purpose of everyone here, so we are all on the same page, I believe you are referring to the Resolution 200 that the Brazilian Central Bank enacted back in the 1st quarter of 2022, which harmonized the regulatory capital regulations for both payment institutions and financial institutions. We, and that regulation became effect July 1st, 2023. We have now, as you correctly pointed out, Frade, been operating as a regulatory, a financial conglomerate in Brazil, encapsulating our payment institution and our financial institution. We, if we look at our financial institution, only our Basel ratio is above 20%.

If you were to look at our, the whole conglomerate, our capital ratio would be closer to 12% in Brazil, compared with the minimum regulatory requirement of 6.75%, which is the metric that has been used by this new regulation. We have almost twice as much capital than we need to operate in Brazil.

Rafael Frade (Equity Research Analyst)

Okay, that's perfect. Thank you. Bye.

Guilherme Lago (CFO)

Thank you, Frade.

Operator (participant)

Our next question comes from the line of Daniel Vaz, Credit Suisse.

Daniel Vaz (Equity Research Analyst)

Hi, everyone. Hi, David, Lago, Youssef, and congrats on the, the strong results. My question is practically a follow-up on Frade's question. There's also a potential significant increase in your CET1 or Basel ratio from July onwards, considering the Central Bank 229 Resolution and consequent reduced RWA factors, considering the transactional portion of your credit card portfolio. On the net impacts from the 30% already from the type three prudential adjustments and these 229, would it be correct to assume that you're net positive for capital ratios, or, or have you calculated the impacts already? Thank you.

Guilherme Lago (CFO)

No, thanks for the question. I think we are super well capitalized. Our capital in Brazil far exceeds the regulatory capital requirements that the new regulation imposes on us, without mentioning the $2.4 billion in excess capital that we have in our holding company. We are fairly comfortably, you know, capitalized. To give you just a general sense, today, our capital position in Brazil amounts to approximately $2 billion. The minimum regulatory that we have is about $1.2 billion. That is the buffer that we have to operate as of today. Our Brazilian operations, as you have pointed out, continues to be quite profitable, generating relevant amounts of earnings. We do expect to continue to have a very comfortable capital position.

Daniel Vaz (Equity Research Analyst)

... Lago, maybe a, a follow-up here.

Guilherme Lago (CFO)

Yep.

Daniel Vaz (Equity Research Analyst)

We see a good, good level of Basel ratio with a also strong profitability of 17% ROE at the holding level. With this good level of organic buildup, is management considering to distribute dividends, or somehow we should expect a stronger capital buffer to support increased origination levels for, for credit, for example?

Guilherme Lago (CFO)

At the holding company level, we have no plans to distribute dividends at this point in time. We do believe that the amount of earnings that we're gonna be able to generate in Brazil and later on in Mexico and Colombia, will basically be reinvested in organic growth opportunities that we have ahead of us in those three geos, right. What we may do at some point in time is do distributions from Brazil to the holding company and to optimize our capital structure. We believe that most of the earnings surplus will be generated and reinvested in the business in the foreseeable future.

Daniel Vaz (Equity Research Analyst)

Perfect. Thank you.

Jörg Friedemann (Investor Relations Officer)

Our next question comes from the line of Neha Agarwala at HSBC.

Neha Agarwala (Senior Analyst)

Hi. Congratulations on the good quarter, and thank you for taking my question. My first question is on yields. When I look at the yields for both your credit card and your personal portfolio, only the interest-bearing part, I see that the yields in the last 2, 3 quarters have been going up. Are you consciously repricing up, which is leading to higher yields, or is there any other factor playing in there? I contrast that with, I think, what you mentioned, if I heard it correctly, about the payroll loans, that you would like to use your cost advantage in the payroll product and be competitive in terms of pricing for the payroll product. Is that correct? Should we expect a similar trajectory for the personal loans and credit card products as you gain profitability?

My second question is, is a quick one on the cost-to-income ratio. Given the, the growth, now you have the deposit product in Mexico and given future growth in, in Mexico, do you expect to accelerate investments in Mexico, or are you at a level where you have all the fixed costs required to operate in Mexico? Thank you so much.

Guilherme Lago (CFO)

Neha, thank you for your question. A lot of questions in this one, let me try to slice them a little bit. In terms of our repricing our personal loans and credit card business, the answer is no, right? We have basically operated with, you know, similar pricing levels over the past few quarters. You may have seen a change in the mix of the products within each of them, and that may have been what actually has driven a little bit more of yields in each of those products. In credit cards, what you will see in the effective yield of the total portfolio is the greater relevance of the interest-bearing balance, as you may see on, let me here, on slide 14 of our earnings presentation.

In short, no, there has not been any, any material repricing in our credit cards or personal loan business in Brazil over the past few quarters. I think your second question is on whether we expect to translate the pricing effectiveness that we believe we will be able to implement in Consignado or payroll loans into credit cards and personal loans. I think the general answer is yes, we do expect to translate additional cost advantages that we acquire into progressively better terms and conditions for our customers throughout all of our products. Whenever we see compelling opportunities, we will, you know, flex the pricing muscle accordingly in a very analytical manner. I think the third question is on, on... Oh, sorry.

I'll pause here, Neha, on pricing to see if I addressed your question before I go into efficiency ratio.

Neha Agarwala (Senior Analyst)

Just to clarify, on the personal loans and credit cards, you would be probably competing on pricing or reducing prices for these two products in the coming quarters?

Guilherme Lago (CFO)

Well, I don't foresee any material changes to our current pricing policies for the, you know, short, in the short term, in the next one or two quarters. Conceptually, in the medium and long term, we do expect to actually use our, you know, better cost advantage, to leverage pricing muscles and be, and be even more competitive in those markets.

David Vélez (Founder, CEO and Chairman)

As I said, Neha, as I said earlier, we, we do our pricing below in the new secure lending type of products that we're launching. Ultimately, you know, if, if, if secure lending, what we call Consignado, does end up growing and being meaningful, that will decrease the average rate that we're charging across the entire portfolio. That would also dilute some of the losses or delinquency numbers that we also show for unsecured lending.

Neha Agarwala (Senior Analyst)

Understood. Very clear. Thank you.

Guilherme Lago (CFO)

Neha, trying to address your the second part of your question, which is on efficiency ratio. As you note on page 20 of the earnings presentation, we have reached about 35% cost to income. We do not believe that we are anywhere near our efficiency frontier. We think we can actually continue to improve the efficiency ratio going forward. Nor do we expect that the additional investments that we're gonna, we're gonna make in Mexico and Colombia will preclude us from continuing to make investments on those fronts, right? We have already frontload quite a lot of the investments that we have made in Mexico and Colombia, especially in terms of headcount, and the velocity through which we're gonna grow headcount.

... over the next, let's say, 12-24 months, it's probably gonna be lower than the velocity through which we grew that account over the prior 24 months.

Neha Agarwala (Senior Analyst)

Great. If I can squeeze just one last thing. The asset quality seems to have turned around and stabilized, earlier infancy stabilizing for Brazil. You seem to be having good momentum in Mexico. What are some of the key challenges or concerns that you're mindful of in the coming quarters?

David Vélez (Founder, CEO and Chairman)

I think a lot of, a lot of the challenges or the main challenge that we are all here very much focused on day in and day out, is around those. I would say the three key priorities we've been discussing since the beginning of the year, and then a number four. I'll go through them quickly. The first one is secure lending. We, we launched secure lending in Q2. We now really gotta see it scaling. It's a big opportunity for us. It's all about execution. High income, as Lago earlier said, it's a marathon, not a sprint, because it's a competitive space, and there is a lot that we need to build to win in that category and to get to the share that we wanna be getting.

We're putting all, all, all hands on deck on trying to put together a great value proposition there for that customer segment, that we already have in the building, which is the good news, but we need to figure out how to get... Increase the share. Then, really cracking Nu Account and funding in Mexico and Colombia, which are critical aspects to decrease funding costs in both countries, get the funding that we need to continue growing in both countries, and to accelerate user growth, customer growth. Those are, those are the three key, kind of, key priorities for us from the company that we are very much focused on. I think beyond that, it really is the multi-product story.

It is this evolution that has already taken a couple of years, and we need to continue executing on becoming a full place, having the full, complete portfolio of products, of financial products. Then beyond, as we execute the marketplace strategy, we have integrated already over 150 different commerce partners into our app. People are being able to make reservations in our app, people are being able to, to shop in our app. We see the opportunity of us being bigger than a financial services firm. We think opportunity is a consumer technology platform where over 85 million customers that have very significant engagement and usage come to transact in a number of different ways, and we're able to help them even beyond financial services. That is going beyond financial services.

That takes a number of different skill sets and, and learnings that we are trying to build in-house, and there is a lot of focus in us also executing that core part of the longer strategy of the company.

Neha Agarwala (Senior Analyst)

Perfect. Thank you so much for the answers.

David Vélez (Founder, CEO and Chairman)

Thank you.

Operator (participant)

As a reminder, we ask analysts to limit your interactions to one question and one follow-up, so we can take all of the questions in the queue. We go now to Alex Markgraf at KeyBanc.

Alex Markgraf (Equity Research Analyst)

Thanks, everyone. I appreciate the question. Maybe just first, would love to hear a bit about how credit limits within the credit card product have changed, kind of on a sequential basis through the years you look at new cohorts.

Youssef Lahrech (President and COO)

Yeah, Alex, thanks for the question. This is Yusuf. You know, our approach generally on credit limits is to start, you know, with a fairly conservative credit limit, you know, also known as the lower and growth strategy for, for, you know, most customers, especially the customers that tend to be in the middle to higher risk segments of the universe. What you observe is for, for a given cohort, we tend to start pretty low and then expand, you know, as we observe data and, and good repayment and performance behavior. On a given cohort, that you, you'll see, you know, fairly rapid expansion of credit limits. Then as new cohorts show up, they tend to dilute the average.

In general, I would say, like, the rate at which we're increasing credit limits has been, you know, pretty steady across the last couple quarters.

Alex Markgraf (Equity Research Analyst)

Just to clarify, the starting point, I guess is, you know, part of the question, that level of conservatism, has that changed materially?

Youssef Lahrech (President and COO)

No, it really hasn't. I mean, as, as a matter of fact, our general credit philosophy is, you know, irrespective of the point at which we are in the cycle, we subject, you know, any new credit grants we have, any new cohorts, to fairly high requirements in terms of resilience. You know, typically we expect, whether it's our credit card or personal loan cohorts, to be able to withstand a doubling of losses and still be above hurdle in terms of returns and, and NPV positive. You know, that's what, that's what we do kinda, you know, throughout the cycle. That hasn't really changed, you know, materially in the past.

Alex Markgraf (Equity Research Analyst)

Okay. Just one quick follow-up on the cost to acquire, just kind of moving higher the last several quarters. I mean, the paid marketing component seems to be stable. Just wanted to understand kind of what's driving that. Obviously, it's still a very good number, but just want to understand what what's taking it to $7 versus what was previously, I think, $5.

Guilherme Lago (CFO)

Alex, what we have seen in customer acquisition cost is, our being a bit more aggressive in Mexico and Colombia as we expand into these geos. Especially at the beginning when we were operating with no credit cards only.

What you will see, however, in Mexico over the coming quarters, is as we launch, Cuenta Nu, our banking account product, and now millions in customers are onboarded, the customer acquisition cost of Mexico to come down. What we expect, however, going forward, is customer acquisition cost to be between $5 and $10. That range still provides us with what we believe to be a very compelling, you know, LTV to CAC.

Alex Markgraf (Equity Research Analyst)

Great. Thank you, Lago.

Operator (participant)

Our next question comes from the line of Eugene Simuni at MoffettNathanson.

Eugene Simuni (Managing Director and Lead Fintech Analyst)

Hi, guys. Thanks for squeezing me in. Great results here. I just wanted to ask about card issue-- issuance volumes trends in Brazil and for you guys. Obviously, very strong number with 30% year-over-year growth in your purchase volume, FX-neutral, I believe. Much, much better, consistently than what Brazil market is doing. It is decelerating at a relatively rapid pace. When we look at the Brazil overall numbers, kind of with ABECS reports, there seems to be significant deceleration this year as well.

Just curious to hear your thoughts on kind of what's going on in the market overall in terms of card issuance in Brazil, maybe some impact from Pix, that you are seeing, and then how that then gets reflected, in your, in your, personal growth, and kind of what we can expect in the second half of the year and going forward?

Guilherme Lago (CFO)

Eugene, thanks, thanks for the question. I think it's very hard to address this question without making reference to the normalization post-COVID. What we have seen over the past two years, I would say 2021 and 2022 in Brazil, it was a very strong recovery from COVID loss and a fairly aggressive extension of additional credits in the country, additional credit cards in the country. Over the past, I wanna say six to 12 months, you've seen a deceleration of credit expansion in consumer finance in Brazil, including but not limited to credit cards. We continue to outpace the industry by, by fairly large amounts. We have been gaining, you know, market share at a clip of about, you know, 40 to 50 basis points per quarter throughout the past quarters.

We expect that this pace is, is to continue in the coming quarters, even though we do not necessarily target kind of a market share goals. The pace at which we have been able to onboard new customers, the pace at which we have been able to mature existing cohorts and cross-sell credit cards, suggests that we will continue to gain market share at good paces in the foreseeable future.

Eugene Simuni (Managing Director and Lead Fintech Analyst)

Got it. Just maybe a very quick follow-up. Are you seeing any sort of negative impact from Pix success on card volumes?

Guilherme Lago (CFO)

No, absolutely. No, I think we have seen. What we have seen is Pix being a phenomenal kind of a payment mechanism in Brazil. First and foremost, what Pix has been cannibalizing, in our view, is cash. That's the first item that Pix, Pix has been cannibalizing. We also have seen some early signs of Pix potentially cannibalizing debit and prepaid cards, but we have not seen any evidence of Pix cannibalizing credit cards. In fact, if anything, what we have seen is a very strong correlation of the adoption of Pix and financial inclusion in Brazil, and financial inclusion in Brazil sometimes comes coupled with the expansion of credit cards. It's also a relatively similar trend to the one you may have seen in India with UPI, but it's too early to draw many parallels between those two geographies.

Eugene Simuni (Managing Director and Lead Fintech Analyst)

Got it.

Youssef Lahrech (President and COO)

This is Youssef. I would just also reiterate something that, you know, David spoke about, and we spoken about in the past, which is first order impact for our portfolio of Pix has been on credit, has been the rapid adoption of Pix financing using credit card limits. You know, that's been a big driver of the increase in interest-bearing balances for us. That's been a tailwind, quite frankly.

Eugene Simuni (Managing Director and Lead Fintech Analyst)

Got it. Perfect. Thank you, guys. That's all I have.

Operator (participant)

Our last question comes from the line of Jamie Friedman, SIG.

James Friedman (Equity Research Analyst)

Hi, thank you, Jörg. Lago, in your prepared remarks, you observed the strength in the debit and prepaid component of the newer cohorts. I'm just-- It's like slide 9 and 10. I'm just wondering, as that population or that representation increases in your portfolio, are there specific products for financial inclusion that you would think would be better targeted towards that type of population? I'm just curious about the debit, prepaid mix. Thank you.

Guilherme Lago (CFO)

No, thanks for the question. I think, if I can draw your attention to slide 12, you will be able to see the evolution of credit cards and, and prepaid years. As I have noted before, for the younger and earlier cohorts, you do see a higher preponderance of prepaid cards there. We think that that is a good pathway into a consumer credit strategy inside the bank, in which we can start the, the relationship with a customer with a prepaid card only. As we learn more about the customer, their, you know, income patterns, spending patterns, and savings patterns, we can progressively gain, you know, more comfort and offer this customer a, a credit line in a credit card.

We usually start, as Youssef mentioned, with a relatively low credit lines through low and grow, and then as the customer builds his or her own kind of a credit history with us, we expand this over time. You can see that the purchase volume follows this expansion. Usually, purchase volume can triple within the first 24 months. That has been very successful for in the form of customer engagement, but also in the form of no asset quality. And it's probably a formula that we expect to continue to pursue in the coming years.

James Friedman (Equity Research Analyst)

Thank you, Lago.

Guilherme Lago (CFO)

No, thank you, Jamie.

Jörg Friedemann (Investor Relations Officer)

In the name of Nu Holdings and its management team, I'd like to thank you all for the participation in this conference call. Over the coming days, our team will be responding to the questions sent through our webcast and email. We also take the opportunity to make our whole IR team available to any further questions you might have. This concludes our earnings call. As well, a good night.

Operator (participant)

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