Nu - Q3 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Welcome to Nu Holdings conference call to discuss the results for the third 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. [Foreign language]. 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, and thank you all for joining our earnings call today. If you have not seen our earnings release, a copy is posted in the Results Center section of our investor relations website. With me on today's call are David Vélez, our Founder, Chief Executive Officer, and Chairman; Youssef Lahrech, our President and Chief Operating Officer; Guilherme Lago, our Chief Financial Officer; and Jag Duggal, our Chief Product Officer. Throughout this conference call, we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for Nu Holdings, but are not financial measures as defined by IFRS, and may not be comparable to similar measures from other companies. Reconciliations of our non-IFRS financial information to the IFRS financial information are available in our earnings press release. Unless noted otherwise, all growth rates are on a year-over-year FX neutral basis.

I would also like to remind everyone that today's discussion might include forward-looking statements, which are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties, and could cause actual results to differ materially from our expectations. Please refer to the forward-looking statements disclosure in our earnings release. Today, our Founder, Chairman, and CEO, David Vélez, will discuss the main highlights of our third quarter 2023 results and provide an overview of our company flywheel. Subsequently, Guilherme Lago, our CFO, and Youssef Lahrech, 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'd like to turn the call over to David. David, please go ahead.

David Vélez (Founder, Chairman, and CEO)

Thank you, Jörg. Good evening, everyone, and thank you for being with us today. Once again, in Q3 2023, Nu continued its remarkable upward trajectory, demonstrating strong operating performance, fast growth, and increasingly robust profitability. We remain focused on executing our business plan without distractions, while keeping an eye on the significant growth opportunities we have as a company in the long run. Reflecting on one of the key milestones of the third quarter, our pace of customer growth exceeded our expectations, culminating in over 89 million customers at the end of the quarter. Once again, we witnessed robust customer acquisition in Brazil, Mexico and Colombia, with slightly more than 1.5 million new customers per month. Over the past 12 months, our customer base growth in Brazil has outpaced that of the five largest incumbent banks combined.

Additionally, we welcomed over 700,000 new customers from Mexico during the quarter, driven by the rollout and continued expansion of Cuenta Nu, and the unlocking of our member and member referral programs potential. Our business model continues to demonstrate its ability to drive both growth and profitability. In the third quarter, our revenue surged to $2.1 billion, marking a 53% year-over-year increase. Our gross profit reached $915 million, doubling year-over-year, while our gross margin expanded once more, reaching 43% this quarter, solidifying the upward trajectory initiated last year. Sequential gross margin expansion, coupled with further efficiency improvements, significantly boosted our net income, which reached $303 million, and adjusted net income stood at $356 million, reflecting a 34% quarter-over-quarter increase on an FX neutral basis for both.

This slide provides a high-level overview of our financial performance trends over the past two years. It underscores our ability to consistently expand our customer base and increase revenues while driving profitability. Notably, in October, we reached a significant milestone by surpassing 90 million customers, firmly establishing us as the fourth largest financial institution in Brazil in terms of the number of customers. We're as the second largest, measured by the number of customers with access to a credit product. The robust growth of our customer base, driven by the growing cross-selling and upselling opportunities facilitated by our highly engaged platform, resulted in a more than fourfold increase in quarterly revenues in just two years on an FX-neutral basis. This translates to a triple-digit revenue annual compounded growth rate over this period.

The third chart on this slide effectively illustrates our prudent pricing strategy and robust underwriting capabilities, where quarterly gross profit calculated as total revenues minus funding costs, transactional expenses, and credit loss allowances also increased by more than fourfold in the same period. This growth was achieved while maintaining healthy gross profit margins, despite increased credit delinquency observed in the market over the past 12 months. Lastly, we believe the synergistic impact of the mentioned factors, combined with the potent operating leverage of our platform and the maturation of our early products in Brazil, has led to a significant acceleration in net income growth. This growth is evident in the chart on the right, covering the past three quarters. We anticipate this compounding effect to continue in the coming periods, resulting from the combination of sustained growth and enhanced profitability within our platform.

As evident from this slide, our platform continues to showcase its cross-selling potential, offering our customers comprehensive solutions as we continue to expand the scope and diversity of our product offerings. While our initial focus was primarily oriented towards unbundling financial services, as our platform has evolved, today, we expect our most significant opportunities to lie in the rebundling of financial services by creating a diversified, multi-product, multi-segment, and multi-country portfolio of businesses. As illustrated on this slide, even our complementary businesses have successfully attracted millions of customers, highlighting our impressive cross-selling capabilities. As we will delve into later in this presentation, we believe that critical product launches announced this year and slated for 2024, will help further solidify our position as the preferred banking partner for an increasing number of customers. We expect this, in turn, will drive the expansion of our growth and profitability engines.

I'd like to take a moment to delve into our company's flywheel, a pivotal driver of our past growth and an essential foundation for our future success. The core element of our strategy is very simple. We work extremely hard to make customers love us fanatically, as we build what we think are the very best products and services in the markets we operate. This obsession for our customers' experience enables our customer base to expand, both in terms of size and engagement. By the end of Q3 2023, we had achieved an impressive milestone, with over 50% of Brazil's adult population as part of our customer base and steadily increasing market shares in Mexico and Colombia.

This level of scale allows us to aggregate both structured and unstructured data, which becomes an invaluable competitive asset, as we currently accumulate over 30,000 data points on each active customer annually, and this is growing exponentially over time. Through harnessing cutting-edge technology, we've transformed this data into actionable intelligence, continually enhancing our credit underwriting and customer insights models. These model refinements, in turn, empower us to broaden the scope of our product offerings, reaching even larger segments of the populations we serve. This scale also allows us to reduce our operational costs, efficiency, which we then decide to pass to our customers via lower prices, helping us to provide better products and services at competitive rates, and thus starting the virtuous cycle again.

The momentum we're seeing over the past 12 months is a direct result of this flywheel accelerating, and in Q3, we had the opportunity to throw fuel to the flywheel with the introduction of new lending products, such as payroll lending, where we decided to price at very competitive price points. The efficiency of our model also enables us to make these pricing decisions while maintaining healthy unit economics. We're seeing meaningful price elasticity in these products and are excited about the opportunity to use our efficient cost structure and data sophistication on our customers' behalf. Now, I'd like to highlight how our flywheel isn't just driving customer acquisition data growth, but also sustaining strong momentum in our key financial metrics. As our three geographic regions continue to expand, benefiting from the inherent operating leverage of our model, our holding company is effectively converting its potential into profits.

In the third quarter, Nu Holdings achieved an impressive adjusted net income of $356 million, reflecting an adjusted annualized return on equity of 25%. We believe our current level of profitability already positions us ahead of most traditional incumbent banks in the Latin American region. It's worth noting that we have achieved this remarkable result, even as Mexico and Colombia continue to be in the early stages of investments, and we believe Nu maintains a considerably larger capital base compared to our peers. As a reminder, our holding company holds $2.3 billion in excess capital, which can be strategically allocated to our operating subsidiaries as we continue to grow. As a reference, if we take our Brazilian operation, considering this excess cash, we could cover 3.1x the required capital for Brazil.

It's important to underscore that we're achieving these strong levels of profitability while making substantial investments in future products and geographic expansion. Simultaneously, we're delivering a robust 53% year-over-year revenue growth rate, a feat that we believe few financial institutions at our scale can match. As you can see, we're once again thrilled with the momentum of our business, and now I'd like to pass the floor to our CFO, Guilherme Lago, who will guide you through our financial numbers. Over to you, Lago.

Guilherme Lago (CFO)

Thank you, David, and good evening, everyone. As David mentioned, we have once again achieved a strong quarter in terms of our operating and financial key performance indicators. This accomplishment is a result of our commitment to a simple, yet powerful value-generating strategy, which can be summarized into three guiding principles. First, we continue to expand our customer base in the markets where we operate, quickly transforming new customers into active ones. Second, we are focused on increasing the average revenue per active customer, or ARPAC, through effective cross-selling and upselling initiatives. And third, we are dedicated to achieving growth while maintaining one of the industry's lowest operating cost structures. Let's delve deeper into our third quarter results to understand how these three principles continue driving value for our company.

During the third quarter, our customer base continued to display impressive growth, expanding by 27% year-over-year, as we welcomed 5.4 million new customers, bringing our total to 89.1 million customers at the quarter's close. Notably in Brazil, our monthly net additions remained steady, with slightly over 1.5 million customers, a significant portion of whom were acquired through cost-effective organic channels. In Mexico, our customer count crossed the 4.3 million mark, and in Colombia, we are now serving nearly 800,000 customers. We are preparing to introduce our savings account in Colombia by year-end, anticipating further growth. Our active customer base increased by 29% year-over-year, with the monthly activity rate posting another sequential quarterly increase, reaching 82.8%. We believe this outcome underscores Nu's effectiveness in engaging our customers on our platform.

Turning our attention to revenue expansion. The first chart highlights the Nu has established primary banking relationships with nearly 60% of our active customer base. As we have emphasized in previous discussions, the more customers choose Nu as their primary bank, the more products they tend to utilize. We see the synergy between these two factors as continuing to be the driving force behind the sustained quarter-over-quarter growth in the ARPAC. The second chart illustrates our product cross-selling performance, showcasing our successful strategy of introducing new products to our customers, effectively cross-selling and establishing ourselves as their primary banking partner. Lastly, the third chart depicts our ARPAC performance. This chart represents the compounding effect of our expanding customer engagement, as demonstrated in the first chart, combined with our growing product cross-sell capabilities, as shown in the second chart.

In this quarter, our monthly ARPAC reached a new milestone, breaking into double digits at $10. Furthermore, our more mature cohorts are already achieving a monthly ARPAC of $26. The increase in ARPAC has resulted in another quarter of solid revenue growth, as depicted in the next slide. Monthly ARPAC has continued its growth trend, expanding by 18% year-over-year for yet another quarter. As we have emphasized in previous discussions, our confidence remains high that there is still untapped potential for further ARPAC growth, moving us closer to realizing what we believe is our full ARPAC capacity. This ARPAC growth, coupled with the expansion of our customer base, has led to a 53% year-over-year increase in revenues, reaching a new record high of $2.1 billion. Now, let's delve into our cards business.

Purchase volumes have surged to BRL 29 billion, marking a 28% increase compared to a year ago. Once again, this growth has been primarily driven by our successful product upsell and cross-sell strategies, as well as stronger customer engagement.... The chart on the right illustrates the correlation between purchase volumes and the aging of customer cohorts. Notably, older cohorts continue to exhibit higher purchase volumes, spending more per month compared to recent cohorts. We believe the compounding effect of integrating millions of new customers each quarter, coupled with their gradual transition to higher spending patterns, will help support the future growth of purchase volumes.

When comparing our purchase volume relative to the market, this quarter, our market share for credit cards stands at approximately 13.7%, up from 12.2% one year ago, with prepaid cards at 15.5%, compared to 12.8% one year ago. As we continue to gain ground, our confidence in our ability to capture additional market share in the future grows. This confidence is grounded in the consistent pace of customer acquisition and the deepening maturity of their relationships with us. Our credit cards and personal loans portfolio, also known as the consumer finance portfolio, reached a significant milestone this quarter, now amounting to $15.4 billion and marking a 48% year-over-year growth. Both segments of our portfolio maintained their growth trends.

Credit card loans expanded by 46% year-over-year, now standing at $12.3 billion. We believe this growth is a direct result of our consistent pace of customers onboarding into our ecosystem and our low and grow credit expanding approach. Furthermore, our personal loans portfolio growth rate accelerated sequentially, registering a 48% increase year-over-year and reaching $3.1 billion. Our personal loan cohorts continue to exhibit the expected behavior, enabling us to increase originations for yet another quarter. We see meaningful opportunities to continue to expand our credit portfolio going forward with attractive returns and robust resilience. As a result, this may intentionally lead to higher delinquency rates, but our goal is to ensure that those will be more than offset by additional revenues and result in higher risk-adjusted net interest margins.

Now, let's delve deeper into the breakdown of interest-earning loans within our credit card portfolio. Our interest-earning installment balance continues its growth this quarter, now constituting 21% of our total credit card loan portfolio. This expansion is a direct result of our strategic commitment to bolstering our transactional financing product portfolio with a special emphasis on Pix financing. This strategy is intended to capitalize on the increasing adoption of Pix in Brazil, where we remain one of the leaders among Pix service providers. Over the past year, we have steadily expanded our transactional financing portfolio, and we see its performance reinforcing our belief in its ability to deliver highly attractive risk-adjusted rates of return. This approach not only allows us to monetize our credit card business and our Pix market share, but also unlocks substantial value for our customers.

Our personal loan portfolio continues to demonstrate impressive resilience, aligning with our expectations for asset quality and allowing us to steadily sharpen our credit underwriting and expand our origination levels. In the last quarter, personal loan originations saw a 93% year-over-year increase, reached an all-time high of BRL 8.9 billion. Furthermore, we have made substantial progress in broadening our lending product portfolio. Year to date, we have introduced payroll loans for federal public servants and retirees, as well as FGTS-backed loans for the wider Brazilian population. Additionally, we have initiated the offering of unsecured personal loans for our Mexican customers. While these new products may not have a material impact on origination volumes or on credit portfolio for 2023, we expect them to lay the groundwork for continued growth and an even more resilient credit portfolio in the coming years.

Our confidence in our ability to sustain and drive substantial growth in the personal loan segment is underpinned by several factors. These include our substantial and expanding customer base, our strong underwriting platform, our robust capital base, and our ample liquidity position. Moreover, as of June thirtieth, around 50% of the outstanding balance of unsecured personal loans in Brazil was already held by Nu's clients, and nearly 40% of the outstanding balance of payroll loans in Brazil is also held by Nu's clients. In essence, we believe we have significant opportunities to expand our market share in this credit products while selectively targeting our most valued customers.... Now, let's turn our attention to funding. Our total deposits continue their growth, expanding by 26% year-over-year, and reaching $19.1 billion this quarter.

This progress indicates another significant stride towards the realization of our objective, which is building one of the most robust local currency retail deposits franchise in the region to support our consumer finance operations across the three geos where we operate. Our loan-to-deposit ratio, or LDR, for this quarter remains stable at 35%, with deposit growth showing sequential acceleration. One year ago, our LDR was at 25%, indicating our ongoing efforts to optimize our balance sheet. We believe there is still ample room for additional balance sheet optimization ahead. Our cost of funding for this quarter held steady at 80% of the interbank deposit rate of Brazil, aligning with our expectations. This consistency underscores our progress in harnessing the value of our robust liability franchise.

We anticipate a slight decrease in the cost of funding next quarter, given the seasonality observed in the final quarter of the year. Regarding Cuenta Nu in Mexico, at the close of the third quarter, we had accrued over $150 million in deposits and amassed almost 2.4 million accounts. We believe the strong reception of our value proposition underscores our potential to further expand our deposit franchise model across Latin America. As mentioned previously, we also expect to launch our savings account in Colombia in the near future. Our net interest income, or NII, reached $1.2 billion this quarter, marking another robust period of growth with a 111% year-over-year increase.

We believe this expansion can be attributed to the continued growth of our credit card and personal loans portfolio, which collectively have been the driving force behind the expansion of our NII and our net interest margin, or NIM, reaching new record highs. Our NIM achieved 18.8% this quarter, showcasing an increase of 7.7 percentage points compared to one year ago. Now, let's focus on the third pillar of our strategy: achieving a low cost to serve. We firmly believe that our most relevant and differentiating competitive advantage lies in maintaining a low cost to serve. As we have highlighted in previous discussions, our objective is to sustain a cost to serve at or below the $1 level for the foreseeable future.

In the third quarter of 2023, we once again successfully realized this goal with a cost to serve per active customer standing at $0.90. This figure currently remains virtually unchanged on an FX-neutral basis compared to one year ago, all while our ARPAC increased by 18%. We believe this outcome underscores the robust operating leverage inherent in our business model. Our gross profit increased to a new quarterly record high, reaching $915 million, marking a 100% year-over-year increase. Our gross profit margin reached 42.8%, an increase of one percentage point sequentially and a 10 percentage point increase compared to the previous year. This data underscores the margin expansion that began in the third quarter of 2022.

Notably, Nu achieved this result even in the face of higher credit provisions, a natural consequence of our growth in both credit card and personal loans, as discussed in previous slides. We maintain our commitment to operating leverage as a defining element of our strategy. The chart provided here underscores the ongoing enhancement of our efficiency ratio over time. In the third quarter of 2023, we reached a new all-time low, registering an efficiency ratio of 35%, marking the seventh consecutive quarter of improvement. We firmly believe that this level of efficiency positions Nu Holdings as one of the most efficient companies in Latin America. While we have already achieved an impressive level of efficiency, we anticipate additional gains in operating leverage as we continue to scale through increased customer expansion, product upselling, cross-selling, and the introduction of new features and products.

Also, we believe there's potential for increased leverage in the future, especially as our Mexican and Colombian geos, which are currently operating with losses, reach their inflection points. Lastly, in terms of profitability, we are delighted to report yet another quarter of robust bottom-line performance. Our adjusted net income has reached $356 million. Meanwhile, net income for the third quarter stood at $303 million. These strong and positive results serve as evidence of the effectiveness of our strategy and business model. While we are pleased with the results we have achieved thus far, it's important to reinforce that our business is managed with a keen focus on long-term value creation. With this perspective, our strategy may entail additional short-term investments aimed at unlocking further long-term value creation opportunities.

As I wrap up, let me provide a summary of the sustainable advantages across all four cost pillars. In terms of cost to acquire, we successfully added more than 5 million customers this quarter, while maintaining what we believe to be one of the lowest customer acquisition costs among consumer fintechs and banks on a global scale. On cost to serve, we consistently kept it below the $1 threshold, which we estimate to be approximately 85% lower than that of incumbents. Our efficiency ratio is at 35%, which we believe makes Nu one of the most efficient companies in Latin America. Regarding cost of risk, we have effectively managed the risk within our credit portfolio, even in the face of a challenging backdrop, outperforming competitors on an apples to apples basis in terms of delinquency rates.

And finally, on the cost of funding front, we maintain our cost of funding at 80% of CDI, all while increasing deposit volume substantially, thus closing the negative gap against incumbent banks and widening the positive gap over consumer fintechs. We are pleased with the results achieved this quarter, and we remain confident in our ability to develop and scale best-in-class products, expand internationally, and continue to operate at low costs. Now, I would like to hand the call over to Youssef, our President and Chief Operating Officer, who will walk you through some of the key highlights of our asset quality.

Youssef Lahrech (President and COO)

Thanks, Lago. Good evening, everyone. I will now take you through some of the key indicators of asset quality and credit portfolio health for the third quarter of 2023. Let's begin with NPL trends. Our leading indicator, NPL fifteen to ninety, showed a slight improvement with a decrease of 10 basis points from last quarter, ending Q3 at 4.2%. This was in line with our expectations. Our ninety-plus NPL ratio increased from 5.9% to 6.1% quarter over quarter, and was also in line with our expectations. It's important to note that this ratio exhibits a stock behavior due to loans moving through the delinquency buckets rather than a flow behavior. As a reminder, we haven't sold any credit receivables, so our NPL ratios require no adjustment. Renegotiations stood at approximately 9% of the book this quarter.

It's worth noting that nearly half of these renegotiations were from loans that were current and not past due at the time of renegotiation. Furthermore, about 90% of renegotiations occur before the loan is 90 days late, thus having a limited impact on NPL rates. I'd also like to take the opportunity to reiterate what Lago mentioned earlier. We see meaningful opportunities to continue to expand our credit portfolio going forward with attractive returns and robust resilience levels. We expect that part of that growth will come from expanding down the credit spectrum. As a result, this may lead to intentionally higher delinquency rates, but our goal is to ensure that these will be more than offset by additional revenues and result in even higher risk-adjusted margins as we grow. Now, turning to the performance of our credit card portfolio versus the industry.

These six graphs show the time series of NPLs for credit cards by income band. The purple line represents Nu, and the green line represents the Brazilian industry. As you can see, our NPLs continue to outperform the industry on a like for like basis in most segments, and this is even more pronounced within the lower income bands. The growth of our portfolio has a direct impact on provisions because we front-load credit provisions when originating loans in accordance with IFRS 9 standards. Therefore, the increase in credit loss allowance of $628 million this quarter directly reflects the elevated level of loan origination during the period. Despite this increase in provision volumes, our risk-adjusted net interest margin reached a new all-time high of 9.0% for the quarter, a 100 basis point increase quarter-over-quarter.

Compared to the same period a year ago, risk-adjusted NIM is up nearly 3x. In summary, we're very pleased with our results this quarter, with the progress we've made and the track record we've built over the years. Our asset quality and returns remain robust through the cycle, reflecting our effective approach to pricing and superior credit underwriting capabilities. We couldn't be more excited about the prospects for continued, resilient, high-return growth going forward. With that, we're now ready to address your questions. 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 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 now 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 Jorge Kuri at Morgan Stanley.

Jorge Kuri (Equity Analyst of Latin America Financial Services)

Hi, everyone, good afternoon. Hope you can hear me. I wanted to ask about... Well, first of all, congrats on the numbers. I wanted to ask about credit card growth on a sequential basis. We see the dollar numbers, and those seemingly decelerated quarter-over-quarter, but I'm wondering what the FX impact is in-- You know, I don't-- We just don't know what percentage of the book is Brazil and versus Mexico, so it's hard to look at it on a FX neutral basis.

Just assuming most of it is in Brazil, I'm getting to a FX-neutral quarter-on-quarter growth of credit cards of around 6%, which is, you know, lower than the 10% you registered in the second quarter, and also 10% in the first quarter, so somewhat of a deceleration. So wanted to see indeed, those are the right numbers on an FX-neutral basis, and if so, what do you think explains that much lower growth rate versus the previous quarters? Thank you.

Guilherme Lago (CFO)

Jorge, thanks so much for the question. Yes, I think you are very much right on the need to do an FX adjustment. I think the Brazilian currency depreciated in the third quarter of the year, and therefore it probably makes more sense to look at this on an FX neutral basis. In our calculations, the FX neutral evolution of our total credit portfolio, both credit cards and lending, grew by about 9%, which we believe continues to be a fairly healthy growth. But in terms of credit card, more specifically, in the third quarter of 2023, the overall market decelerated a little bit. We, however, continued to gain share. We grew what we estimate to be anywhere between 50-60 basis points market share in the quarter.

We believe that we have become the second-largest credit card issuer in Brazil already, and we also estimate that we will continue to acquire market share in the coming quarters. There is one additional caveat that I would make in the credit card numbers, Jorge, which is an accounting change that we have made in the way that we account for the credit card receivables. Starting in the third quarter of 2023, the credit card receivables are accounted in our balance sheet as the present value of the future flows, just like the credit card payables, and that has cost us about $150 million-$200 million in the credit card book.

But all in all, I think an FX neutral growth anywhere between 7%-9% for credit card, robust market share gain, and we becoming the second credit card issuer in the country.

Jorge Kuri (Equity Analyst of Latin America Financial Services)

Thanks, Lago. That was a very clear explanation. Thank you. I wanted to ask a follow-up also on credit, if I may. The follow-up is on payroll loans. Is there any metric that you can share on the payroll products during the third quarter? You know, what cross-selling you've been able to do with your clients, what market share of origination you've achieved? Any metric would be very helpful for us to gauge your initial success on that product. Thank you.

Guilherme Lago (CFO)

Yeah. Jorge, let me start with some comments, and then Jag, who is here with us, can certainly share more about the reception of the customer base. So, we've launched, as a recap, the SIAPE consignado product back in April 2023. We've launched FGTS in August 2023, and we launched INSS in October 2023. So the INSS, which is the largest payroll loan business, is not yet represented in our September 2023 books, and we have only now launched portability. So we are in the very early days of the consignado journey or the payroll loan journey in Brazil, but we couldn't be more excited, not only because of the customer reception, to which Jag will allude to, but also given the sheer size of the opportunity that we have ahead of us.

So the payroll loans is the largest asset class within consumer finance in Brazil. It accounts for about BRL 650 billion of credit book, and it also accounts for about 1/3 of the profit pool of retail industry in Brazil. Our customers, if we stop growing today, our customers account for approximately 40% of the total payroll loan books in Brazil. So just fishing inside of a fishbowl, we have a tremendous room of growth. In the third quarter of 2023, consignado or payroll loans accounted for, you know, about BRL 300 million out of our BRL 9 billion origination. So super incipient to move the needle in 2023, but we are very excited with its ability to move the needle for us in 2024 and 2025.

Jag Duggal (Chief Product Officer)

Hi Jorge, this is Jag. Thank you for the question. Let me just complement a few of the points that Lago made. As he said, we couldn't be more encouraged by the initial reception of these payroll lending products as we put them out in the market over the last several months. If you look at the net promoter score for secured lending products, they're at 78 versus a category average of 44, so well above the average. As Lago mentioned, Nubank's customers account for 40% of the balances in the market, and in our originations in these very early stages of the product getting launched was less than 4%.

So we expect a lot of growth in secured lending being driven by secured lending as we head into 2024. The design of the product has been engineered work backwards from the customer needs. We've built the product to be direct to consumer with a much simpler UX than is typical, 100% digital flow. That allows us to offer disbursement of the loan much quicker than what is typical in the market, and we're also able to offer the product at a very low price typical versus what is typical in the market. Our average right now is about 1.39% versus a market average of about 1.8%.

This is also a category where we found customers are very responsive to a competitive price, and the price elasticity has been very, very high. We see a lot of potential here. Great, great early start, but a lot of room to go, as we head into 2024.

Jorge Kuri (Equity Analyst of Latin America Financial Services)

Thanks, Lago and Jag. Very clear. Thanks again, and congrats on the numbers.

Jörg Friedemann (Investor Relations Officer)

Our second question comes from the line of Tito Labarta at Goldman Sachs.

Tito Labarta (Vice President and Senior Equity Analyst)

Hi, good evening, everybody. Thank you for the call, and thank you for my questions. Congrats also on the strong results. I guess first question, in terms of the provisioning levels, it seems at least as a percentage of loans actually came down, for the first time, in some time, actually, as far back as I can see. So, you know, some good asset quality trends. Early NPLs looked a little bit better, 90 days, which are lagging, still going up a little bit. But just some thoughts. I mean, you mentioned as you grow, NPLs can go up, but in terms of where we are in the credit cycle, are you feeling more comfortable there to continue to accelerate growth?

How, how do we think about that cost of risk? Does this mean it's peaked, and maybe that could be a tailwind going forward? And how much of it was kind of impacted by sort of the FX impact on loan growth? I don't know if that had any impact at all. Thank you.

Youssef Lahrech (President and COO)

Hi, Tito. This is Youssef. Thanks for the question. So let me let me address your question with a couple of points. First off, as you know, we don't we don't provide guidance on on NPLs or otherwise, nor do we try to time the cycle. You know, our philosophy is of credit is to originate and manage credit with strong, resilient returns through the cycle. And I think our track record over the last 10 years is a good testament to that. But that being said, I would point out that what you see in our asset quality and delinquency metrics for both credit cards and unsecured lending is the net result of two offsetting forces.

The first thing is you got older cohorts that we've originated in the past that are maturing, and as they mature, they exhibit lower levels of delinquency. The second effect is new cohorts and growth brings higher levels of delinquency as they are in the early part of their life cycle. And as Lago and I mentioned in the earlier part of the call, if anything, we see more opportunities to grow a credit portfolio, in part through expansions, which you know will likely increase NPLs going forward. But that's very intentional, and we're very comfortable you know growing and accelerating that growth because we see those opportunities to expand. They will come with higher levels of returns and higher resilience that will more than offset those higher delinquency rates.

So at the end of the day, our objective is not to minimize NPLs, is to maximize NPV, to originate, you know, resilient, high-return business. So it's our posture is entirely consistent with that objective, and we feel very comfortable, you know, growing going forward.

Tito Labarta (Vice President and Senior Equity Analyst)

Okay. All right, thanks. That's helpful. Thanks for the color on that. And then following up, I guess, a little bit more kinda on the growth outlook that you see. Maybe just on Mexico, if you can give any color. You know, just looking at the regulated data, it looks like the loan portfolio is still not growing, but nice growth in deposits. Clients, you mentioned, picked up as well. I think, Lago, you were in the press recently saying that we shouldn't expect Mexico to maybe be profitable next year. But any color you can give on the growth outlook for Mexico, both on deposits and loans, into next year?

David Vélez (Founder, Chairman, and CEO)

Sure. Tito, hi, this is David. So listen, we remain incredibly excited about Mexico. This is potentially as big of an opportunity as we have in Brazil. It's a very large market with an 11% credit card penetration, and we've seen very good product market fit since we launched about three years ago. I think on the credit side, what you will see us doing forward and what you might have seen us doing historically, is growing a credit product is never a straight line into the up and right. You will accelerate at times, you will decelerate at times, as we include new data sources, as we put new models into production, as we evolve our methodology, as we look at our test data.

I would say over the past couple of months, we are in a phase in Mexico where we are increasing significantly the capabilities of our models, and we're reading a bit the kind of data that's coming out of our models after having gone from zero-

... to one of the largest credit card issuers in the country in about three years. So that's why you might see a bit of the acceleration on the growth on the credit card side. I would expect us to continue growing as we get more comfortable in certain areas, as we read better data, especially around the unbanked population, which is the challenge as well as the opportunity that we see in Mexico, is bancarizing 89% of the country. So on the credit side, I think we continue to grow fast, but I would say we are in a bit of a let's invest more and reaccelerate over the next few months. On the debit side, NuConta has been a phenomenal success.

We're super happy with the initial receivable of the product, which happened over a couple of months. We opened over 2.4 million accounts, over $150 million in deposits in a couple of weeks. We even decided to increase the yield that we're offering in the NuConta in Mexico to double down on the market opportunity that we're seeing there, and making sure that we really position NuConta as the indisputable best savings product in the country. I think with this move on the US side, we are doing that. We're very focused on winning this market, and that's what we're willing to invest. You guys alluded to break even next year. We won't break even next year in Mexico. We wanna continue investing. As we see this opportunity of growth, we'll invest even more.

We're in an opportunity where we have a very valuable and earnings-generating Brazilian business that can fund our growth into new geos, and so that's the playbook that we expect to execute in Mexico and in Colombia. And so, just generally, we're really excited about what we're seeing, but, you know, it will not necessarily be a full straight line. We will accelerate at times, we'll take different speeds, we'll go in one direction, we'll go in a bit of that direction, ultimately trying to become the leading digital banking franchise in the country.

Tito Labarta (Vice President and Senior Equity Analyst)

That's great. Thanks, David, and congrats again on the results.

David Vélez (Founder, Chairman, and CEO)

Thank you, Tito.

Jörg Friedemann (Investor Relations Officer)

Our next question comes from the line of Mario Pierry at Bank of America.

Mario Pierry (Managing Director and Senior Equity Research Analyst of Latin American Bank and Non-Bank Financials)

Hey, guys. Good afternoon. Congratulations on the quarter. Let me ask two questions as well, and they're kind of follow-ups to the questions that have been asked. When I look at your slide on page 14, your loan book this quarter expanded by about $600 million, while we had expanded by $2 billion in the previous quarter. And then when we look on page 16, you show that your origination jumped to $8.9 billion from $7.3 billion. So I'm wondering why, if you're originating so much more this quarter, why your loan book wouldn't have expanded at a faster pace? So I don't know if there's any accounting issues there. So that's question number one.

Question number two is related to your slide on page 26, the NPL trends. You clearly show, right, that you have lower NPLs than the industry, but in some of these charts we see that the industry seems to have that NPLs have peaked for the industry. But when I look at your numbers, they're still rising. You know, like, especially when I look at the one to two months of minimum wage, the two to three months, and also now you're seeing higher NPLs in the higher income brackets than the industry. So I would just like to hear your views here. Like, you know, the industry seems to be peaking, you're not peaking yet. What could explain that, and why are you seeing higher delinquencies in the higher income segments? Thank you.

Guilherme Lago (CFO)

Mario, thank you so much for your questions. Let me try to take the first one, and Youssef can eventually address the second one. So I think the two slides that you mentioned, the main difference that justifies the magnitude of growth is the FX. So the slide 16, if you take a look at the title, it is denominated in local Brazilian reais currency. And when you look in slides, let me get one, the slide 14, that is denominated in dollars. So if you take a look at the growth of our loan book, it would have grown by only 4% in nominal dollar terms. But once you do a FX neutral adjustment, it goes from it goes to between 9%-10%, just because of the FX movements in the quarter.

So we do believe that most of the potential discrepancy in growth pace is a result of the FX depreciation of the Brazilian currency.

Youssef Lahrech (President and COO)

Mario, with respect to your second question on the NPL trends compared to the industry, you're correct in your observation, but that in some of these segments, the industry seems to have peaked and it's coming down. But with respect to our trends, you know, I'll go back to what I said a few minutes earlier, which is, you know, the net impact of older cohorts maturing and more growth being put on the book with higher levels of NPLs, you know, that's the result of that dynamic. We actually expect that dynamic, if anything, to continue into the future as we see opportunities to expand.

And then lastly, on the highest income band, you know, two things I'd say there is, historically, we haven't had a big delta either way up or down versus the industry. And where it actually matters the most is where you have a higher risk content. So the lower income buckets is where we tend to have, you know, a much bigger advantage in terms of sort of apples to apples NPL comparisons.

Mario Pierry (Managing Director and Senior Equity Research Analyst of Latin American Bank and Non-Bank Financials)

... Okay, but as part of your strategy, it is, right, like you're trying to eventually increase your presence among the higher income population in Brazil. Does that mean that you're trying to be a little bit more aggressive, and that's why that NPL could be a little bit higher?

Youssef Lahrech (President and COO)

No, I don't think the monetization or the getting deeper in wallet in high income would cause the trend we've observed on NPLs to deviate substantially. I think it's just the way it's been historically.

Mario Pierry (Managing Director and Senior Equity Research Analyst of Latin American Bank and Non-Bank Financials)

Okay, and well, let me go back then to the first part of the question, right? Because if we convert the origination to dollars, right, like we... And I quickly looked at the FX here. You originated about $1.8 billion this quarter versus $1.5 billion in the second quarter.

Youssef Lahrech (President and COO)

Yep.

Mario Pierry (Managing Director and Senior Equity Research Analyst of Latin American Bank and Non-Bank Financials)

So, when you originated $1.5 billion in the last quarter, we saw your loan book grow by almost $2 billion. And this quarter, your loan book, you know, only grew $600 million. So is there any change in the maturity of the loans you're originating or you originated previously?

Youssef Lahrech (President and COO)

No, Mario, I think, but there has not been any material change in the average duration or in the profile of the loan. I think the origination that you're referring to is related to personal loans only, which accounts for about 20% of our book, more or less, right? So if you take a look on slide 14, and if you do an FX-adjusted gap, you will see the gap in growth is justified for us having an average duration of the personal loan book somewhere between five and six months.

Mario Pierry (Managing Director and Senior Equity Research Analyst of Latin American Bank and Non-Bank Financials)

Okay. Thank you.

Youssef Lahrech (President and COO)

Thank you, Mario.

Jörg Friedemann (Investor Relations Officer)

As a reminder, I ask analysts that I know to restrict yourselves to one question and follow-up, so we can take all of the questions in the call. Our next question comes from the line of Geoff Elliott at Autonomous.

Geoff Elliott (Director of Research)

Well, hello, thanks very much for taking the question. Can you hear me okay?

Jörg Friedemann (Investor Relations Officer)

Yes, we can hear you well. Thank you.

Geoff Elliott (Director of Research)

Thank you. Question on the deposit side. There was quite a big increase in interest expense and particularly interest expense on deposits in the quarter, I think up from something like $400 million to $460 million. I mean, I guess the growth in the previous quarter was a factor, but can you just help us understand that? It looks like quite a big step up in deposit costs this quarter.

Guilherme Lago (CFO)

I mean, Geoff, thanks for the question. If I understand right, you're asking why our interest expenses have gone up?

Geoff Elliott (Director of Research)

Yeah.

Guilherme Lago (CFO)

It's justified by not only the growth in deposits, but also the growth in our financings. Our operations in Mexico and Colombia are primarily funded through bilateral financings and syndicated loans. And they have also contributed to the expansion of our interest expenses.

Geoff Elliott (Director of Research)

Thanks. I was more focused... I think you break out the deposit part in the financial statements and that part, specifically, $401 million in 2Q, $464 million in 3Q. So pretty big increase just on the deposit side.

Guilherme Lago (CFO)

Yeah. So I think the deposit side, the three months of deposits, I'm looking at the financial statements, Geoff, it went from for the three months, went from about $430 million to $463 million in interest and financial expenses, the interest expense on deposits. Which is largely a result of the growth in the sheer size of deposits that reached $19.1 billion in the quarter. The other relatively jump that you see in interest expenses going from $29 million to $74 million, that is the direct result of the growth in the financings of Mexico and Colombia.

Geoff Elliott (Director of Research)

Okay, thanks. Numbers I can see for 2Q look a little bit different, but maybe we follow up later. Thanks. Thanks very much.

Guilherme Lago (CFO)

Thank you.

Jörg Friedemann (Investor Relations Officer)

Our next question comes from the line of Pedro Leduc of Itaú. Pedro, your line is open. Pedro, I think we can't hear you. So let's try to take the next question, and we can come back to Pedro later. So our next question will come from the line of Thiago Batista at UBS.

Thiago Batista (Executive Director and Head of Br Research)

Yes. Hi, guys. Are you listening?

Jörg Friedemann (Investor Relations Officer)

Yes, we can hear you, Thiago. Thank you.

Thiago Batista (Executive Director and Head of Br Research)

Okay. Hi, guys. My question is about the high income segment. You already comment in the past that this should be a focus of Nu in the future. My question is, the first one, is it possible to really achieve to this client without a kind of

... banking manager or branch manager or a financial advisor, do you see these Nu, Nubank serving those clients fully digital? And also, if it's possible to maintain the same level of ROE in your Brazilian operation, let's say 30%-40%, in this high-income segment?

Jag Duggal (Chief Product Officer)

Thank you for the question. As we think about the high-income segment, which you are correct, is an important focus for the company. We think about it in two steps. The first step, for context, is customer acquisition, and the second step is how do we monetize that customer base? Our customer acquisition has made a lot of progress over the recent quarters. We now have about 60% of the high-income customer segment as customers of Nubank, and within the high-income customer segment, we have the leading NPS in the market. On the monetization side, it's a marathon. It's not a sprint, and we're still in the very early days of that process.

We do believe that both the customer acquisition, as we've already demonstrated, but also the monetization, can be achieved with a high degree of customer satisfaction and customer happiness in a digital way. We do intend to invest additional focused efforts to make sure that we're doing everything we can to delight the high-income customers, but we think that can be done following the template of how Nubank has operated over many years, so essentially in a digital-first manner. The initial signs on monetization have been very positive as we build on our customer acquisition efforts. There are, we believe, three core components to having a compelling solution for high-income customers.

There is a payments and banking and account infrastructure that they find compelling, and on that front, we are the leader in terms of, for example, Pix usage at well over 20% share, as a transactional account. On the credit side, we've made a lot of progress this year. We have, for our Ultravioleta product, for example, been able to double the average credit limit. We've been able to roughly double the number of Ultravioleta customers, and we've also been able to double the purchase volume on the Ultravioleta credit card. And as we go forward, we are working on wrapping a bundled solution around that flagship credit card product of Ultravioleta. And on the investment side, overall, we've seen AUC grow 50% year-over-year.

So we believe we're making a lot of progress with high-income customers, getting them to try and start developing the habit of using our products. We have a long journey ahead of us, but we are, we are confident in the direction we're going. We believe we can do that with strong unit economics and, and overall returns, and we believe we can do that with following the Nubank template that we've had historically across the market with a digital-first approach.

Guilherme Lago (CFO)

Just to complement, no, we do not expect that our share of wallet gain in high income will dilute our margins and returns, as Jag mentioned.

Thiago Batista (Executive Director and Head of Br Research)

No, very clear. If I can do a small follow-up. You said—you comment a couple of minutes ago that it's possible to see a higher delinquency ratio together with higher margins, or margins after provisions, at least. This is how do you guys see the Pix finance? Do you believe that Pix finance should bring higher delinquency ratio with higher after provisions margins?

Youssef Lahrech (President and COO)

So, Thiago, the way I think about the impact of Pix financing is just one additional way to enhance the product. You know, it adds ARPAC per customer. It brings, you know, more interest-bearing balances at the customer level. And so it just makes the unit economics of credit card more attractive, which in turn allow us to do a couple of things. One is increase credit limits selectively and also acquire more customers profitably that, you know, we might not have acquired before. So you kind of get the second-order impact of being able to grow more at more attractive returns, albeit for part of those at that higher growth at higher levels of NPS.

Thiago Batista (Executive Director and Head of Br Research)

Very clear, and congrats for the results.

Youssef Lahrech (President and COO)

Thank you.

Jörg Friedemann (Investor Relations Officer)

We will try to come once again to the line of Pedro Leduc, Itaú.

Pedro Leduc (Lead Equity Research Analyst of Brazil Financials)

All right. Thank you so much, Jörg. Hope you can hear me now.

Jörg Friedemann (Investor Relations Officer)

Yeah.

Pedro Leduc (Lead Equity Research Analyst of Brazil Financials)

Coming back quickly to the before mentioned accounting change that you had and impacted the credit card balance. The reason I'm asking is because in our BRL estimates, it looks like the installment credit card product decelerated a lot, and it's probably where this accounting change had most impact. So, it probably grew. If you can help us understand how, by how much, and the innovation products, you know, Pix Credit or Boleto, how relevant they are becoming or how much they grew this quarter. But really trying to get a all accounting constant growth figure for the installment credit card with interest figure for the quarter. And thank you.

Jag Duggal (Chief Product Officer)

No, thank you for your question, Pedro. So let me recap. So the accounting change that we implemented with respect to credit card receivables and credit card payables in the third quarter-

... was one whereby we are now representing those receivables and payables according to their respective present value. And what does that change? So if you take a look at our financial statements in the credit card receivables, in the line that we call receivables installments, that is where you will see those numbers being affected. And in the liability side, in where you call payable to the networks, is where you're gonna see a corresponding impact, almost offsetting each other. With respect, Pedro, to your question about the growth of our interest-bearing balance, I would draw your attention to slide 15, in which you can see that for another consecutive quarter, our, you know, share of revolving balance has remained largely unchanged at about 7%, whereas the share of the financing portion went from 19% to 21%.

Most of this growth can still be attributed to the continuous growth of Pix and Boleto financing.

Pedro Leduc (Lead Equity Research Analyst of Brazil Financials)

Okay, and this, this slide, Lago, the two key was also restated for that accounting change, so it's comparable?

Guilherme Lago (CFO)

No, no, no, it has not. Only we, we started to make this, this new accounting treatment only in the third quarter of 2023. There has been-

Pedro Leduc (Lead Equity Research Analyst of Brazil Financials)

Okay

Guilherme Lago (CFO)

... no whatsoever.

Pedro Leduc (Lead Equity Research Analyst of Brazil Financials)

The impact you said that earlier was, like, $150 million-$100 million, so we can probably do the adjustments here to the comparable then.

Guilherme Lago (CFO)

Mm-hmm. That's correct, Pedro. Thank you.

Pedro Leduc (Lead Equity Research Analyst of Brazil Financials)

Thank you.

Jörg Friedemann (Investor Relations Officer)

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

Eduardo Rosman (Senior Analyst)

Hi. Hi, everyone. I have a question, I think, to David. I think in a recent podcast interview, I think you talked about going beyond financial services, and that you would be dedicating an important part of your time chasing that goal. So, can you share with us, you know, the potential opportunities there? Is this something, you know, that we should be seeing, you know, a couple of years down the road, or, can we expect something, let's say, in the short term? So it would be interesting to know, you know, what you're thinking about. Thanks.

David Vélez (Founder, Chairman, and CEO)

Yeah, sure. Absolutely. So listen, I think when we take a step back and we think about what we're building and what we have built in this, in this 10 years, we realize that with a 90 million and growing fully digital consumer base, which is one of the largest in Latin America already, one of the most valuable brands and highest NPS, a really data-rich ecosystem, very high engagement, and an opportunity to do a lot of cross-sales, this platform that we're building opens up a bunch of new optionalities ahead of us. These are optionalities that are gonna take a long time to figure out, not necessarily something that happens very fast. We are actively thinking about how do we as we take a bit of a revolution around...

Effectively, the first 10 years, we had to catch up to the big banks, right? We started with our simple credit card, unbundling the entire financial services products, and then we were in a complete race to try to fill all the gaps that we had in financial services to be at parity. And we are getting close to parity. Obviously, there are a couple of things that we think improve in certain areas, more insurance products, more investment products, very valuable position for high income. But in general, we're at least getting very close to the core products that somebody needs to have to choose us as their primary bank account. And then, and then we are thinking about the next 10 years on how do we really change the game in the market? How do we escape competition?

This is reinventing a number of several products, and this is using all of those assets that I mentioned, specifically this base, to provide more products and services to our users. So we are here thinking about year four, five, six, seven from now. These are going to be generally low investments over the next few years. We're operating in a way where we have a number of different startups within the startup. Some of the products that we've launched already that we're growing are, for example, Marketplace, where we already have several million users already buying non-financial products and services in our app. We are seeing very significant traction in NuPay, which is a new way to pay online today with a number of different merchants.

We are bringing increasingly the concept of the AI private bank, where we see AI being able to play a significant role. Under that roof, there's a number of our initiatives that we are spinning out, always in a way where they provide a lot of optionality. We like to invest little money upfront, let the teams run, and as we start seeing product market fitting, we get excited about the potential in the long run, we invest more, more resources and energy into this. So big answer to effectively tell you, we're actively thinking about the next five years, but we're also actively thinking about the next ten years. We think the opportunity ahead of us is just much bigger than simply building one of the most profitable and efficient banks in the world, which we're getting close to be.

We wanna make sure that we take advantage of the opportunity of some of these different assets that we have been able to accommodate and aggregate under one roof for the past few years.

Eduardo Rosman (Senior Analyst)

No, great. And, and again, thanks, thanks for the numbers, and then congrats on the results.

David Vélez (Founder, Chairman, and CEO)

Thank you so much.

Jörg Friedemann (Investor Relations Officer)

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

Neha Agarwala (Equity Research Analyst covering LatAm Financials)

Hi, congratulations on the results, and I have a few questions. First, on credit cards-

Jörg Friedemann (Investor Relations Officer)

Sorry, Neha, I apologize that we can't hear you very well. Would you mind speaking up a little bit?

Neha Agarwala (Equity Research Analyst covering LatAm Financials)

Sure. Is this better?

Jörg Friedemann (Investor Relations Officer)

Yes, it's slightly better. Thank you.

Neha Agarwala (Equity Research Analyst covering LatAm Financials)

Okay, I'll try to speak loudly.

Jörg Friedemann (Investor Relations Officer)

Now, it's perfect. Thank you.

Neha Agarwala (Equity Research Analyst covering LatAm Financials)

Okay, perfect. The first question is on the credit cards. I noticed that the stage three loans for credit cards has continued to rise for the last few quarters and increased from 7.7% last quarter to 8.1% this quarter, while the cost of risk for credit cards as such has continued to decline quarter on quarter. So could you explain that dynamic why the cost of risk is declining and the stage three loans continue to increase? My second question is on capital. I noticed the increase in the RWA and that the Basel ratio has halved to almost 11% now. Given the large increase in the RWAs, do you see the need of say, sending some capital to Brazil in next year?

Or do you think the profit that is generated in Brazil will be sufficient to meet the capital requirements? Any color on that? And, and lastly, and I know this is something which, we don't have much clarity on today, but, any update or any views on the, pending, credit card regulation would be very helpful. Thank you so much.

Guilherme Lago (CFO)

No, thank you. Thank you so much for your questions. Let me try to start from the last one, and then we'll bring forward. So on the credit card industry regulation. So, those continue to be ongoing discussions involving multiple parties of the credit card industry, both issuers, acquirers, merchants, consumers, and the Brazilian Central Bank, and the Ministry of Finance, and soon the Ministry of Planning as well. We have been an active participant in those discussions, and we believe we have the unique opportunity to promote a more ambitious and positive overhaul in how credit cards is structured in Brazil. And, we are very encouraged by the last discussions that we have had with the parties, and we believe that we will probably have more clarity about this when we have our next earnings call.

Very soon for us to actually draw any high conviction outlook on how this will unfold, but we are working very hard together with the industry and the regulator to have a positive outcome that allows us to have a much more balanced product going forward. To your second question, I think you related to the increase in capital. I believe it's important to highlight that in 2022, the Brazilian Central Bank put forward a new regulation, which is usually referred to as Resolution 200, which basically harmonized the capital regulations of payment institutions and financial institutions.

As a result of that, as you can see on section 32 of our financial statements, you will note that the Brazilian Central Bank has enacted a gradual implementation of this new norm, whereby the minimum capital adequacy ratio starts at 6.75% in 2023, goes to 8.75% in 2024, and then finally to 10.5% in 2025. Also, payment institutions that control financial conglomerates will now have to report consolidated capital adequacy ratios. The result of all that is that we have a capital adequacy ratio in Brazil of 11%, whereas the minimum capital requirements today, it's 6.75%. We have a fairly relevant buffer in Brazil, and in addition to that, we have $2.3 billion of excess liquidity at our holding company. We are super comfortable.

It's unclear to us whether we will ever need to capitalize our Brazilian entities going forward. It will largely depend on the growth pace of our credit book. But we are very comfortable that with the business plans that we have for Brazil, Mexico, and Colombia, those are fully funded and fully capitalized, and the earnings that we generate in Brazil, plus the excess capital that we have at the holding company, will more than suffice to fund all of this plan for the foreseeable future.

Youssef Lahrech (President and COO)

Hi there, this is Youssef. So with respect to your first question on what is going on in the dynamics of the various stages and provisioning, you know, I would refer you to note 13 in our financial statements, which contains all the breakdowns and the details, stage by stage. You can look at the coverage ratios and the migration across buckets. But overall, I would summarize it just very simply by saying that stage three tends to largely correlate with 90+ past due delinquency rates. So it kind of mirrors what is going on there. And as I mentioned earlier in the call, as you know, we write off credit card loans in our Brazil credit card portfolio at 360 days.

So what tends to happen is you enter 90+, and then for several months, those loans accumulate, and as they accumulate, you know, and go further and further in delinquency stages, what tends to happen is coverage ratio increases. So you see just those mechanics playing out.

Neha Agarwala (Equity Research Analyst covering LatAm Financials)

Thank you so much.

Jörg Friedemann (Investor Relations Officer)

Thank you, Neha.

Our next question comes from the line of Yuri Fernandes at JPMorgan.

Yuri Fernandes (Executive Director and Equity Research Analyst of LatAm Financials)

Thank you, everybody, and congrats also on another good quarter you printed. I have a question on fees. We see interchange still being 75% of your total fees, but we don't see other fees growing, and you have many initiatives, right? You have the investment platform, you have the insurance, you have the program of those partners. When should we see the fee line growing? Because the interchange are growing, but it's growing, like, 25%-26% year over year, and we still don't see. So just trying to get your expectations on those non-credit related business. Thank you.

Guilherme Lago (CFO)

So Yuri, thanks for the question. And, and look, we do have this portfolio of business through all the company, which we classify in three archetypes. We have the anchor business, the growth business, and the moonshots. And the anchor business, which we classify as the, the credit card lending and, and our banking account, are doing extremely well, and their profitability is basically overshadowing the very positive results and performance that we are having in more emerging business. But you pointed out some of the business that we have today that are actually, you know, performing fairly well. I would highlight the investment business, whose assets have increased by over 50% over the past 12 months. Number of customers have doubled.

So we do expect that over the coming, you know, four to eight quarters, we will have much more visibility on the more growth and moonshot business that will progressively emerge into our new anchor business of the next, you know, three to five years. Having said that, however, if you take a look at the profit pool of the Brazilian retail industry, about 70% of the profit pool is still composed by consumer credit, namely credit cards, unsecured personal loans, and secure personal loans. So it should not be a surprise that, as of today, the majority of our revenues and gross profit margin also comes from some of those consumer finance products.

I believe as the new business that we have, namely investments, marketplace, insurance, continue to emerge, we will have more and more visibility of their financial and non-financial performance in the coming future.

Yuri Fernandes (Executive Director and Equity Research Analyst of LatAm Financials)

Super clear, Lago. Thank you. I will limit myself to just one question. Thank you.

Guilherme Lago (CFO)

Thanks, Yuri.

Jörg Friedemann (Investor Relations Officer)

Thank you, Yuri. And our next question comes from the line of Craig Maurer at FT Partners.

Craig Maurer (Co-Director of Research and Managing Director)

Thanks for taking the questions. So two questions. One, the activity rate showed strong improvement. Can you characterize what were the underlying drivers to that? Was it the growth in primary banking relationships, or was it the launch of payroll? And secondly, you know, you're talking about going down the credit quality ladder, which could drive delinquencies a bit higher. I'm curious your thoughts on how that might affect the portfolio if Brazil goes into another soft period regarding credit. Should we expect to see a more significant rise in losses as a result? And how are you thinking about that with regard to provisioning?

Guilherme Lago (CFO)

Craig, thank you so much for, for your question. Let us, let us take this in steps. So the first question is about the activity rate, and I will draw your attention to slide 10, in which you see that activity rate has basically continued to go up from about 82% to now closer to 83%, notwithstanding the very strong growth of our customer base. I think that is largely explained and correlated with our progress towards primary banking relationship. If you take a look at the chart on slide 11, which is the following one, the chart on the left indicates the primary banking relationship cohort analysis that we present every single quarter. And as you may note, we now have almost 60% of our active customers being primary banking relationship customers.

You can also note that we are getting to more than 50% faster and faster over time. For the 2018, 2019 cohorts, it used to take us about 50 months to get there. Now, it's taking us less than 12 months to get there. Why is this happening? I think it is happening as a result of external factors and internal factors. External factors is that as consumers, where we operate, embrace real-time Pix, embrace digital banks more and more, they more easily embrace the business model of Nubank. That has become even more pronounced during and after COVID. The internal factors is actually the chart that you can see in the center of this slide, which is as we launch more products, as we launch more features, we earn the right to be the primary banking relationship of more and more customers.

So if you were a customer of Nubank back in 2017, you had only one product, credit card. Arguably, it was very hard for you to be our primary banking relationship customers with credit card only. But as we launch bank account, Pix, investments, insurance, marketplace, NuCoin, we have a much more compelling value proposition, a much more complete set of products, and that foster primary banking relationship, that foster engagement. We do not see this trend stopping or declining. On the contrary, we think that we will continue to launch best-in-class products, disruptive solutions, and with that, we will not only sustain high levels of activity, but we will also fostering the continuous expansion of those activities. So I'll, I'll pause here. I will pass the floor to Youssef to address your second question related to credit underwriting.

Youssef Lahrech (President and COO)

Hey, Craig, on the, you know, credit expansions and what does that do to the credit book, in the event of a downturn? So just as a reminder, we underwrite, obviously, seeking to maximize NPV, but also we underwrite for resilience. What does that mean practically? It means that every, you know, additional loan we book, every new customer that we onboard, we want them to be profitable and above hurdle returns in the event of a downturn. So specifically, when you look at a cohort level, we underwrite our cohorts such that they're able to withstand the doubling of losses and still be NPV positive.

So that gives us a lot of resilience and a lot of, and a strong ability to withstand, you know, variability and, and, the ups and downs of the cycle. That's one thing. The other thing I'll point out is, you know, thinking about the various segments within the credit spectrum, you know, having a high-risk segment doesn't necessarily mean it's gonna be a higher volatility segment in the event of a downturn. Those tend to be, you know, sort of very dependent on what kind of down cycle we're in. We know we've seen, you know, in other markets, more mortgage holders deteriorate more than the average. We've seen, you know, small businesses sometimes deteriorate more than the average. So it really depends on what kinda cyclical dynamic you're facing.

And again, you know, we take the approach of wanting to have, you know, through the cycle, strong, resilient returns in everything we underwrite.

Geoff Elliott (Director of Research)

Okay, thanks for the answers, guys.

Youssef Lahrech (President and COO)

Thank you.

Jörg Friedemann (Investor Relations Officer)

This concludes the earnings call for the third quarter. In the name of the holdings and its management team, I want to thank you all for your participation in our conference call today. Our IR team is fully available to any additional follow-ups, and we will be responding to questions sent via webcast over the coming days. With that, we finish our earnings call. Have a good night. Thank you.