Nu - Q4 2022

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Welcome to Nu Holdings conference call to discuss the results for the fourth quarter of 2022. 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 a listen-only mode.

You may submit online questions at any time today using the Q&A box on the webcast. I would now like to turn the call over to Mr. Jörg Friedemann, Investor Relations Officer at Nu Holdings. Mr. Friedman, 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 Result 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. Additionally, Jag Duggal, our Chief Product Officer, will join us for the Q&A session of the call. 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. Reconciliations of the company's 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-on-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 the company's expectations. Please refer to the forward-looking statements disclosure in the company's earnings press release. Today, our founder and CEO, David Vélez, will discuss the main highlights of our fourth quarter 2022 results and some of the opportunities ahead. 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, CEO, and Chairman)

Thank you, Jörg. Hello, everyone. Thank you for being with us today. Once again, I am happy to share that Nu posted another record quarter, showing continued growth across all our metrics, including meaningful increase in profitability. We will also be disclosing numbers for Nu Brazil specifically today, which we think show a very exciting picture. We welcome more than 4 million customers to our platform this quarter, and we now have close to 75 million clients across our three geos, posting a growth of 38% year-on-year. We're now the fifth-largest financial institution in Brazil and the sixth-largest financial institution in Latin America in terms of number of customers. Let's now dive into the main operating highlights of the quarter and of the year. During the fourth quarter, our revenue amounted to almost $1.5 billion, growing 112% year-over-year.

The triple-digit expansion in revenues is the compounded effect of the strong expansion of our active customer base in Brazil with our ability to cross-sell products and foster client engagement. Nu also expanded gross profit by 137% year-over-year to $578.3 million in the fourth quarter of 2022. The significant expansion for gross profit margin, which reached 40% this quarter, up from 36% in the fourth quarter of 2021, reinforces the operational leverage capacity of our business and the strong execution of our team. In 2022, we succeeded both in terms of pricing adequately credit products amidst adverse conditions and adapting our funding costs to deal with much higher than expected interest rates.

As a result, Nu Holdings delivered an adjusted net income of $113.8 million in the fourth quarter of 2022, up from $3.2 million in the fourth quarter of 2021. The Brazilian operations highlighted in the right side of the slide continue to mature and contribute meaningfully to these results with 93% of our revenues generated by this geo. Adjusted profits for the Brazilian operations reached $157.7 million in Q4 of 2022, up from a loss of $3.8 million during the fourth quarter of 2021. Our progress in Brazil illustrates how our business model is able to start generating winning meaningful profits while growing revenue over 100%. The beginnings of Nu were based on the unbundling of financial services back in 2013.

Now our most important business opportunities rest on the rebundling of financial services by building a diversified multi-product, multi-segment, and multi-country portfolio of businesses. As you can see in this slide, even our adjacent businesses already achieved the notable figure of one million customers, attesting the company's cross-sell capacity. Despite the growing scale of our core products, Nu is still in the early days of its product development life cycle. That said, the signs of inflection of the S-curve for our products are already clear. This slide is meant to show two things. First, the pace at which we develop and launch new product has accelerated over time. Second, our product portfolio is well-positioned to deliver multiple years of strong growth.

While new accounts and credit cards have just reached the inflection points of their growth stages, most of our other products are at earlier stages of their life cycles, suggesting still high levels of upsell and cross-sell potential for multiple sources and for years to come. We will continue to expand our platform with disruptive products that further strengthen our relationship with our customers and enable us to acquire increasing levels of customer principality and share of wallet across all demographic segments. Our most important launches in 2023 include the expansion of our lending products in Brazil into secure lines, such as public payroll, and the launching of savings accounts in both Mexico and Colombia. Just as Nu is in the early days of its product development life cycle, it is also in the early days of its international expansion.

Over the past decade, we have successfully expanded our operations in Brazil, having reached a customer base that represents 44% of the adult population of the country. It is inevitable that our customer growth in Brazil over the coming years will be lower than what we experienced over the last years. Our growth in Brazil will progressively pivot from customer acquisition into customer monetization. Conversely, however, we're still at the early stages of the customer acquisition life cycle in Mexico and Colombia, countries in which our penetrations are still low, but early signs of performance are extremely encouraging. Mexico and Colombia are beating Brazil at practically every single customer growth and engagement metric. They're growing faster and showing NPS levels higher than those of Brazil. In both of these countries, we have already become the top issuer of new credit cards.

The stages of development for our three geos are complementary and expected to provide Nu with very strong growth engines for years to come. To better showcase the earnings potential of our model, we want to spend a few minutes digging specifically into our Brazil business, which continues to show very strong top-line traction and also meaningful bottom-line profitability. Over the past four years, we expanded our client base in Brazil by 11x, having reached a penetration of 44% of the adult population of the country. 70%-80% of the clients came to Nu through organic channels, mostly member-get-member, providing us with strong growth virality and one of the lowest customer acquisition costs among fintechs and incumbent banks globally. We have been successfully applying the same playbook in Mexico and Colombia.

The compounding effect of customer growth and higher levels of customer monetization have resulted in strong top-line growth in Brazil. In the fourth quarter of 2022, our Brazilian operations recorded $1.4 billion in revenue, 110% year-on-year growth, and a gross profit margin of 44%. Adjusted net income grew progressively over the past quarters, reaching $158 million in the fourth quarter of 2022, for an annualized adjusted return on tangible equity of 58% and an annualized return on equity of 40%.

Although part of this number was positively impacted by the seasonal effects observed in the first quarter of the year, such as higher purchase volume and lower cost of funding, one can see that the profitability of our operations in Brazil has reached an inflection point and already positioning us among one of the financial institutions with the highest return on capital in the country. We believe we're still in the early stages of the development of our model in the country, with still significant upside in terms of both top-line growth and operating leverage. Finally, this slide details the outcome of our strategy in Brazil and at the holding level. The viral expansion of our customer base, combined with our successful cross-selling and upselling strategies, have driven strong profitability in our Brazil business.

Beyond a fourth quarter that is positively affected by seasonality, Nu Brazil posted a return on tangible equity of 25% and a return on equity of 15% for the full-year of 2022, even considering the losses reported in the first quarter of the year. While 2022 was a challenging year micro wise and very critical for us as we build trust as a newly public company, we could not be more proud of our 2022 results, which largely exceeded our internal expectations. We proved that it is possible to maintain an accelerated rate of growth as we gain share in every product vertical and geography while keeping credit delinquency in check, improving operating leverage, and ultimately showing strong profitability.

These achievements, as important as they are, represent only the first steps of what we can deliver in the future once our new geos mature and, similarly to Brazil, scale further and start to compound the profitability potential that our model creates. With that, I would like to pass the floor to our CFO, Guilherme Lago, who will walk you through more details of our results. Thank you.

Guilherme Lago (CFO)

Thanks, David, good evening, everyone. To better frame the discussion around our year-end results, I would like to recap the three key elements of our simple and powerful value-generating strategy. Number one, continue to grow our customer base in the markets in which we operate, Brazil, Mexico and Colombia, and quickly converting new customers into active ones. Two, expanding average revenue per active customer or ARPAC through both cross-sell and up-sell. Three, delivering growth while maintaining one of the lowest cost operating platforms in the industry. Our fourth quarter results show positive evolution in each one of these three pillars. Let's start with the first pillar of our strategy, customer acquisition. In the fourth quarter, we added 4.2 million and ended the year with 74.6 million customer, a 38% increase year-over-year.

In Brazil, we are steadily adding between one million and 1.5 million customers per month, the vast majority of which still come from referrals, which lowers the acquisition cost and accelerates activation. In Mexico, we surpassed 3.2 million customers by the end of the quarter. As per the last available data for 2022, Nu's market share in terms of new cards issued in the country approached 29%, while share of purchase volumes for credit cards already achieved 5%. Our strongest growth in relative terms was in Colombia, where our customer base reached nearly 600,000. In Colombia, Nu accounted for 38% of the number of new cards in 2022, as per the latest available information, with 2% market share in terms of purchase volumes for credit cards.

The second part of this pillar is activation, where we continue to drive higher levels in the fourth quarter. Our overall monthly activity rate reached 81.9%, 5.6 percentage points higher year-over-year, and the 11th consecutive quarter of sequential increase. We are seeing positive and increasing momentum during activity in all of the three markets in which we operate, despite their different stages on the S-curve. Let's move to the second pillar in our strategy, revenue generation. The three charts on this slide show a clear relationship. Let's start with the chart on the left. We are very proud that as of the end of 2022, 58% of our active customers had chosen Nu as their primary banking account or PBA. This is the holy grail of the financial services business and the cornerstone of our model for three simple reasons.

One, PBA customers generate ARPACs that are much higher than those of non-PBA customers. Two, PBA customers present 90-day NPLs that are much lower than those of non-PBA customers. Three, PBA customers also have lower levels of price elasticity and adverse elections than those of non-PBA customers. The number of PBA customers underscores the development of a model that effectively engages and serves our customers with multiple products and throughout all stages of their life cycle. It begins with how we attract clients, which is through a powerful engine based on customer referrals. The more customers use Nu as its primary bank account, the greater the number of products they use and the higher the monthly ARPAC they generate. With every cohort, we have been able to accelerate the pace at which Nu becomes the primary bank account of our customers.

We have also been able to accelerate the pace at which our customers use our products. These two factors compound to speed up ARPAC for newer accounts and also helping to push up the overall ARPAC of the company. For the fourth quarter, our monthly ARPAC continued to increase and achieve $8.2 per month, pushed by both the increasing in cross-selling and upselling of our new cohorts and the maturation of our older cohorts, whose average ARPAC reached $23 per month. We can see in this slide that our monthly ARPAC continues to grow sequentially, expanding 37% year-over-year. The higher number of active clients, combined with higher ARPACs, prompt the sustained growth in our revenues. Revenue grew 112% year-over-year to $1.5 billion, another record high.

Our revenue in 2022 was nearly three times higher than in 2021, almost seven times higher than in 2020. Turning to our cards business, we continue to experience strong growth with purchase volumes up 54% year-over-year to $24 billion. In 2022, purchase volumes reached $81 billion, an 85% increase over 2021, demonstrating the power of our product cross-sell, up-sell, and customer engagement capabilities. Most of the purchase volumes continue to come from our older cohorts of customers, which spend three to four times as much per month as recent cohorts. While there's a difference from the outset between newer and older cohorts, as shown on the chart on the right-hand side, both show a clear upwards trend of consumption over time. On average, credit card spend for a customer who has been with us for more than 24 months triples.

We expect the substantial amount of clients we added in the last two years to increase their purchase volumes with our cards as their relationships with us continue to mature. Our consumer finance portfolio, composed of credit card and personal loans, reached $11 billion, a 62% expansion over year-end 2021. Our credit story has two tales. On the one hand, credit cards continue to grow strongly at 69% year-over-year as more clients are added to our ecosystem and our loan grow methodology plays out. On the other hand, we have been more cautious with the originations in the personal loan portfolio, aligned with the higher risk of this product. Originations and personal loans increased slightly, and the overall book grew sequentially during the fourth quarter to $2 billion.

The pace of growth has been lower than that of credit cards at 33% year-over-year. With the ongoing performance of the book, we expect this to accelerate over the coming quarters. Now let's review in more details the evolution of our credit card portfolio and the originations of our personal loans. We continue to pursue our strategy of increasing the share of our credit card loans that earn interest, closing the gap as compared to the market. We have narrowed this gap by offering our customers interest-earning installment loans on their credit cards, which as of the fourth quarter surpassed market levels and represented 12% of our credit card loan book. We see attractive risk-adjusted rates of returns on this type of finance. It allows us to monetize our credit card business beyond simple fee generation and fulfill a customer need.

At the same time, we have been intentional in not expanding our share of revolving receivables, which continues at 7% of our total receivables, and once again, widening the gap versus the market, whose revolving now accounts for 17% of total receivables. We base our origination of personal loans on the latest performance of our own cohorts, our assessment of risk going forward, including our judgment of the economic and credit environment. We have seen positive performance to date, leading to gradual increases in our origination volumes. We expect this trend to continue going forward as long as this positive performance track record persists. Indeed, we continue to see upside in our ability to drive growth in lending in a healthy and profitable manner. We have substantial reach given the size of our customer base.

We believe the risk assessment in our platform is best in class, allowing us to deliver superior products and experience to our customers. We also have strong capital base and an ample liquidity to increase our leverage. As market conditions improve and allow our credit risk appetite to increase, we should be able to deploy capital effectively and profitably. This strategy should be reinforced with the upcoming launch of secured lending. In July 2022, we launched Money Boxes, which are personalized investment tools. We also started to remunerate deposits at 100% of the Brazilian interbank deposit rate, retroactively and only for amounts that remain on deposit for more than 30 days. Given their staged rollout, these two changes did not materially affect our funding cost in the third quarter. In the fourth quarter, we started to see the full impacts of these changes.

In the fourth quarter of 2022, our cost of funding improved to an all-time low of 78% of the interbank deposit rate. This led our financial expenses to decline quarter-over-quarter. We are now starting to unlock the value of the strong liability franchise that has been built over the past years. Our deposit base continued to grow. Deposits increased 55% year-over-year to $16 billion. We have seen no material impact on the deployment of Money Boxes or the changes in remunerations on our deposits inflow. The success of this new strategy already has had an important effect on our profitability for the fourth quarter and should be recurring in the subsequent quarters. The successful implementation of our new funding strategy, combined with the continued growth of our credit portfolio, made a meaningful contribution to our results in the fourth quarter.

This is most visible in our net interest income or NII. Our NII reached $688 million this quarter, growing 30% quarter-over-quarter. The improvement in our cost of funding helped increase in our net interest margins or NIM 2.4 percentage points over the level of the third quarter to a record high of 13.5%. While we can attribute much of the recent gains in net interest margins to our new funding strategy, we expect this trend, respected seasonality, which is especially strong in the fourth quarter to continue going forward based on three factors. Number one, the growth in our credit portfolio, which should surpass that of our deposits. Number two, the adequate pricing of our credit products as we continue to build underwriting resilience with pricing.

Number three, the improved mix of our loan book, especially as we resume the growth of our personal loans over the coming quarters. Let's move to the third pillar in our overall strategy, maintaining a low cost to serve. We believe our platform is one of the most cost-effective in serving customers in the markets in which we operate. For the fourth quarter, our cost to serve amounted to $0.90. On our year-over-year comparison, our cost to serve did not grow. This achievement is even more impressive considering how much we evolved in terms of products per customers and PBAs. Over the same period, our ARPAC increased 37%, clearly illustrating the strong operating leverage of our business model.

Looking ahead, as we said in past quarters, we expect our cost to serve to remain at or below the dollar level as the scale gives us significant operating leverage and bargaining power with our suppliers. In terms of gross profit, we achieved $578 million, up 137% year-over-year, a significant acceleration versus the growth posted last quarter. This level of gross profit was the highest we have ever achieved. At the same time, our gross profit margin of 40%, 4 percentage points higher year-over-year, accelerated the pace of recovery started in the third quarter. To illustrate how far we have come, our gross profit of $1.7 billion in 2022 is more than two times higher than of 2021, and nearly five times higher than of 2020. Operating leverage is a key element of our strategy.

With the full benefits becoming increasingly clear as we advance product penetration and drive revenue growth. This is visible in our efficiency ratio, which improved for the fourth consecutive quarter to reach an all-time low at 47% or 41% excluding share-based compensation. This is already comparable to the levels of efficiency of Latin American incumbent banks, but it is still far from the potential of our platform that continues to collect the benefits of scale. We expect our operating leverage to continue to be captured as our scale increases, although there might be seasonal variations affecting this number. In the fourth quarter, in particular, our platform benefited from stronger purchase volumes and deposits inflows. Moving on to the bottom line. We posted another quarter of improving bottom line performance.

In the fourth quarter of 2022, our adjusted net income and net income amounted to $114 million and $58 million respectively. These results are encouraging as they serve to validate our strategy and our business model. However, we reinforce that we look at our business with a view towards long-term value creation, which may require us to make additional investments in the short term to optimize our long-term opportunities, and we expect to continue managing the company this way. We see this fourth quarter and the year of 2022 as a whole as evidence of our sustainable cost advantages. On cost to acquire, we added over 20 million customers during 2022 and presented one of the lowest customer acquisition costs among fintechs and banks globally.

On cost to serve, we held it constant on an FX neutral basis throughout the entire 2022, despite the inflationary pressures in the countries in which we operate and increasing levels of customer engagement. On cost of risk, we successfully managed the risk in our credit portfolio amid a very challenging backdrop, and continue to outperform competitors when comparing apples to apples. Youssef will provide more details on that short. On cost of funding, we began to unlock the potential of our deposits franchise, starting to close the negative gap we had against incumbent banks and widening the positive gap we have against fintechs. As we go into 2023, we expect the trends from the fourth quarter to continue to gain traction. In particular, we emphasize our ability to develop and scale best-in-class products, expand internationally, and operate at very low costs.

Now I would 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. Let me take you through some key indicators of asset quality and overall credit portfolio health for the fourth quarter of 2022. Let us start with overall NPL trends. Our early delinquency indicator, NPL 15 to 90, improved this quarter by 50 basis points, reaching 3.7%. This was driven by two main factors. Number one, the improvement in the credit performance of our personal loans portfolio in response to the management actions taken in Q2. Second, the favorable seasonality that takes place during the fourth quarter when early delinquencies usually trough. It is important to note that that trough is usually accompanied by a rebound in early delinquency rates during the first quarter of each year. 90+ NPL ratio increased from 4.7% to 5.2%, behaving in line with the expected stacking behavior of these buckets.

I wanna take this opportunity to reinforce that Nu has never sold delinquent loans, which otherwise would have had a purging effect, thereby artificially lowering delinquency rates. With respect to loan renegotiations, they remain at around 7% of our book, with approximately half of those coming from current and not past due customers at the time of renegotiation. For the credit card portfolio, these six graphs show the time series of NPL by income band, where the purple line represents Nu and the gray line represents the industry. As we already mentioned during previous calls, and as you can see on these updated charts, we continue to outperform the industry on a like-for-like basis. For the lower income bands, our comparative advantage is even more pronounced.

The gap for each income band continues to widen as you look at the trend over time, demonstrating that our competitive advantage in underwriting remains consistent and sustained. Just as in past quarters, provisions continue to grow, primarily driven by the growth in our portfolio. We front-load provisions when we originate loans based on the expected losses for the life of the credit in accordance with IFRS 9's expected loss methodology. This quarter, much of the expansion in our risk-adjusted NIM can be traced back to the improvement in our cost of funding. Even after adjusting for that factor, we would still see risk-adjusted NIM stronger than that of the third quarter and even stronger compared to that of the fourth quarter of 2021.

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 Vélez (Founder, CEO, and Chairman)

Thanks, Youssef. It has now been a little over one year since our IPO, and despite much more adverse conditions than we could have anticipated, we're proud to have over-delivered on our commitments to the market. Our over 8,000 colleagues delivered these results through an unwavering focus on strong execution, and we thank each and every one of them. Let me now close by summarizing some of the most important changes in the environment, how we adapted our strategy to deliver on what had been promised, and what lies ahead of us for 2023. First, in late 2021, no one expected the sharp increase in policy rates that skyrocketed to almost 14% in Brazil.

To mitigate this, we launched Money Boxes, and six months later, we lowered our cost of funding to 78% of the CDI from about 100%, while both deposits and Money Boxes continued to grow sequentially and strongly. Second, with a tougher environment for asset quality in Brazil, we became more restrictive in originating personal loans while repricing our products and building resilience within our portfolios. In parallel, we accelerated the launch of secure lending with the general launch of payroll lending in Brazil expected in the upcoming quarter. We're confident that this is a disruptive solution for customers which will foster growth into different client segments, thus furthering balancing our credit book. Third, we doubled down on smart efficiency moves to foster profitability and showcase the operating leverage of our model.

One of these moves was the termination of the CSA, which will save the company $70 million per year. Beyond that, it reinforces how committed Nu as a company is to accelerating value creation for all of our shareholders. Our efficiency ratio will continue to improve progressively over the coming years as we capture cost savings opportunities and reduce the rate of headcount growth going forward. Finally, in 2023, we will prioritize winning our first share of wallet in the upmarket in Brazil, where there remains tremendous opportunity growing our personal lending book, both secure and unsecured, and expediting the inflection of the growth model in our new geos. Almost two million customers with monthly income of BRL 12,000 are already clients of Nu. Our share of wallet with them is currently approximately 10%.

In 2023, we will also break into a secure lending market, positioning payroll loans as a core product to complement our personal lending product shelf and widen our growth opportunities in the country. Last but not least, 2023 will be the year in which we'll launch and deepen the penetration of Cuenta Nu in both Mexico and Colombia. We should accelerate the growth and sustainability of our platform in these countries. We will continue investing significantly in both countries as we think the potential price is very significant. We enter 2023 with a lot of strength and are excited to continue proving our model across products and geographies. We would like to take your questions now. Thank you very much.

Operator (participant)

We will now start the Q&A session for our 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 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 Jorge Kuri, Morgan Stanley.

Jorge Kuri (Equity Analyst of Financial Services)

Hi, good afternoon, everyone, congrats on the fantastic results, and thanks for the additional disclosure on the Brazil numbers. The profitability at this point is evidently really impressive. Congrats on that. I wanted to ask about the Moneybox. It was a really positive surprise to see your funding cost at 78% of CDI, down from 95% in the previous quarter. To what extent this is a seasonal improvement based on the fourth quarter excess liquidity that normally, you know, comes in customers because of the thirteenth salary? Is this sort of like the level from which you could continue to improve in 2023? What do you think is the opportunity for you to continue to improve that number?

If I remember correctly, I think in a couple of public forums, you said that maybe by the end of 2023, the funding cost could be at 80%, but evidently you were at 78% at the end of last year. How do you see that evolving? Thank you.

Guilherme Lago (CFO)

Hi, Jorge. Thank you so much for your question. We do expect the funding cost to remain largely at the same levels throughout the coming quarters, respective seasonality. As you correctly pointed out, in the fourth quarter of every year, we have the additional flow from the 13th salary, which has, in the month of December 2022, pushed down a little more, the cost of funding than would otherwise be expected in a so-called normal month. However, we haven't yet seen the full impact of the change in the remuneration. We will only see this in the 1st quarter of 2023. With those gives and takes, we do expect that cost of funding at today's levels is a sustainable level for us to see throughout 2023.

Jorge Kuri (Equity Analyst of Financial Services)

Great. Thank you very much, Lago.

Jörg Friedemann (Investor Relations Officer)

Our next question comes from the line of Tito Labarta from Goldman Sachs. Operator, please open his line.

Tito Labarta (VP)

Hi, good evening, David, Lago, Youssef, and Jag. Thank you for the call, and taking my question. You know, congratulations. You know, pretty impressive results. My question is a little bit on the competitive environment. Just looking at, you know, now you're at 58% of your active client base you have as primary banking clients already. You know, when we look at the industry, you know, some of your incumbent peers, particularly the ones focused on, you know, similar regions or income levels, seem to be suffering a lot more than you are. Just to think about, you know, how... What do you think has been able to differentiate you and really manage this credit cycle in a way that, you know, many people didn't think you potentially could and be able to deliver the results that you can?

If you could talk a little bit about how competition perhaps is influencing that'd be helpful if you give some color on that.

David Vélez (Founder, CEO, and Chairman)

Sure, Tito. Thank you very much for the question. Listen, I think the story that we're playing out is a very different story than the incumbents banks are playing out because on one end, we have 44% of the adult population in Brazil as a customer. A very meaningful population. On the other end, we have very small market share still in a lot of our products. In credit card, we have something like around 13%. On personal loans, we have about 3%, 4%. We get to grow within our consumer base, cherry-picking the best customers, and can continue gaining share even if the environment is pretty adverse. That's the first big differentiation.

The second consideration is, this is I think a point that perhaps the market hasn't understood that well, we are growing our credit book within our own, what in Brazil called correntistas or the close ocean. We give credit to customers that use our primary bank accounts, that are getting their salaries in our accounts, that are using our apps to do payments or getting an insurance. That generates a lot of loyalty on one end, and that generates a lot of information that we can use for underwriting. We are not providing credit in the open ocean, as a lot of banks have actually done over the past 12 months. There's been a lot of growth in that open ocean. It's been a different strategy.

As a result, we get to continue to cherry-pick within a base that we understand and that we know. The third consideration is we've actually always looked to provide products that are very good for consumers, and we've been very careful about taking into account ratios on household debt. Just to give you one data point. The credit card product, we don't think revolving as a product is a good product for consumers to finance. It's a very high interest rate. Consumers enter into that product, and they ultimately end up getting very high losses. As a result, we look for customers that pay on time. We've always looked for customers that pay their bill on time. If we could choose, we would get 100% customers that pay on time.

As a result, what you see is in the market, about 70% of customers of the incumbent banks getting to the revolver. For us, it's only 7%. We end up with a consumer base that is healthier, that is less leveraged, that provides more data to give us information around underwriting, and that we ultimately get to cherry-pick to provide credit and continue to grow, even if the environment, as a big headline, is adverse and generates some risk. Regardless of that, we did, though, decide to take it a little bit slower, as you saw in 2022, especially in consumer lending, which was a newer product.

As you will see, as you see here on the delinquency numbers on Q4, which ended up being better than we expected, even though there is some seasonality, we already started growth again and feel comfortable that we can start tweaking up the growth on the lending side. We will be monitoring this very closely. If the environment shifts, we are very agile and can shift very quickly as well.

Tito Labarta (VP)

Great. Thanks, David. That's very clear, very helpful. One follow-up, if I may. You know, thanks for the slide 10, showing that profitability in Brazil, you know, it's already showing annualized of 40%. You still have a very underlevered balance sheet and, you know, efficiency's improving pretty quickly. Do you think there's still upside to that 40% ROE in Brazil as you expand the product base, you know, the whole upsell and cross-sell to your clients? Do you think there's some upside to that number from here?

Guilherme Lago (CFO)

Tito, we think that the profitability levels that we are showing now are a good testament of the long-term potential of the profitability that we can have as a digital bank. It provides clear evidence in our view about the cost molds and the revenue advantages that we have. In the long term, we do believe that there's more upside optionality there. In the short term, we don't provide guidance. For 2023, we do expect to see some puts and takes in this equation. We do expect, on one hand, to see the caps on the interchange of prepaid cards coming into fruition on April 1st. We do expect that as we accelerate growth, this will, you know, put additional weight on our margins.

Conversely, as tailwinds, we expect that we will continue to grow and extract even more operating efficiency out of our system. All in all, we think 2023 is another year of a healthy level of, you know, returns on equity, respected seasonality across the quarters. In the long term, we believe that there's more profitability for us to extract from the model than we have seen so far in Brazil. We also hope that Brazil is also a good showcase to what we can develop in other geos. As we can see in the S-curve that David showed, Mexico and Colombia are a few years behind Brazil, but we have no doubt that they will achieve profitability levels at the same zip codes as the ones that we are achieving in Brazil in a few years.

David Vélez (Founder, CEO, and Chairman)

Just to add a bit on that, Lago, I think ultimately, if you take a step back and go back to kind of first principles of the business model that we've always been espousing, is the model of digital banking should provide much higher ROE than traditional banking because ultimately you are operating with costs that are over 85% lower than incumbents. We don't have branches in every corner. We don't need hundreds of thousands of employees. We don't need a lot of very expensive headquarters. All of that, we don't need it to serve customers and even provide a better experience. That has always been sort of the hypothesis. We've tried to prove it through unit economics.

When we show economics of the products that we have, In lending, they're upwards of 60%. In credit card, they're upwards of 100%. Now we finally get to prove it to you with an actual geography like Brazil, that is at a mature level and can start showing this level of ROE. While there are some benefits of seasonality in Q4, as Lago mentioned, ultimately that is the direction that I think the model will converge towards in Brazil and in other geographies as well.

Tito Labarta (VP)

That's very clear. Thanks, David. Thanks, Lago.

Operator (participant)

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

Mario Pierry (Managing Director)

Hi, guys. Congratulations on the quarter. A quick question from me. When I look at your net interest margin evolution, you clearly benefited from lower funding costs. We're looking here at the model, and we're also seeing higher lending spreads, right, on your products, even though your mix is going against you given that you're growing more on credit cards than personal loans. My question is related, you know, to your ability to continue to reprice, you know, not only given the competitive environment, but the health of your clients, right? Like we know the economy in Brazil, it's okay, it's not doing great. We know that consumers in Brazil are facing the effects of higher rates, higher inflation, their disposable incomes. Just wanted to understand here, like if you see much more room for repricing your product.

As a follow-up to that question, you know, we have been hearing a lot of noise in Brazil of potential implementation of interest rate caps on credit card loans. If you could discuss that as well, that'd be helpful. Thank you.

Guilherme Lago (CFO)

Hi, Mario. Thank you so much for your question. Let me try to break them in two. First a little bit on net interest margin, and then the second one on the cap. On the net interest margin, as you have seen, I'll draw your attention to slide number 22 of our presentation. We have seen a fairly material expansion over the past four quarters. We expect that this expansion will continue as a result, largely of two factors. Number one, we do expect that the credit portfolio will outpace the growth of deposits, and therefore we should see the loan-to-deposit ratio going up, and that should be by and large, a big, you know, tailwinds to net interest margins.

Number two, we do expect that the continue of the lower cost of funding that should increase the margins that we have. We are not relying, going straight to your question, on additional repricing of our products, but we believe that we will see kind of a shift in mix throughout 2023. I think personal loans, unsecured personal loans, on one hand may outpace the growth of credit cards. Conversely, we should also see throughout 2023, the beginning of, you know, the consignado or public payroll loans. The combination of this changing in mix should provide us also with an expansion of net interest margin by and large. I think that is my attempt to address your first question.

Basically, net interest margins is expected to continue at a healthy pace, not because we will reprice the products up, but because of the growth of the lending portfolio and the continuous lower of cost of funding. That is the number one. Number two, on the cap on credit cards. We have been hearing and discussing with a few analysts and investors about this question, and this is a question that has been lingering in Brazil for over a decade now, right? For over a decade, we have seen attempts to restructure and reshape the unit economics of credit cards. We have been investing a lot of time understanding this and actively participating in these discussions. We don't think that there's gonna be any short-term change to the unit economics of credit cards.

It is a very complex product that if you change one thing in interest rates, you should probably also change other things in interest-free installments. Therefore, it poses for a very complex outcome. It is our view also that interest rate caps and credit cards will largely lead to lower levels of financial inclusion and lower levels of credit availability to the general public, which seems to be the opposite direction at what, you know, the Brazilian Central Bank and the current administration wants. We don't see any of those risks in the short term, but we are watching this carefully and participating in the debate.

Mario Pierry (Managing Director)

Very clear, Lago. Thank you very much.

Operator (participant)

Our next question comes from the line of Gustavo Schroden and from Bradesco.

Gustavo Schroden (Senior Equity Research Analyst of LatAm Banks and NonBank Financials)

Hello. Good afternoon, everybody. Congrats on the bottom line, strong bottom line. Thanks for the call. My question is about is indeed about the bottom line and the, or the net income. I understand that you do not provide an official guidance, and I could hear your answer on the Tito's question. My point here is that if we annualized, for example, the fourth quarter results, we could have a sense or a feeling about what would be the net income in 2023. Right? What I'm trying to understand here is that, do you think that would be reasonable to use the fourth quarter results as approx for earnings quarter or earnings during the coming quarters in 2023 to have as a starting point for us? Do you see some change over the course that could change the dynamics that we saw in the fourth quarter? Thank you.

Guilherme Lago (CFO)

Gustavo, thanks so much for your question. It is, it's a challenging question to address, as we don't provide guidance. But I think 2023 provides for a mix of gives and takes, as I've mentioned to Tito. On average, we expect that we will continue to pose relatively healthy levels of returns on equity and bottom-line profitability in Brazil. Although we do expect to continue to see seasonality playing its role throughout 2023, as we have seen in 2022. If you take a look on slide 11 of the presentation, you will see that our, you know, adjusted return on equity for the third quarter of 2022 was about 20%, that it went up to 40% in the fourth quarter.

We expect to continue to see those trends throughout 2023, but healthy levels of profitability nevertheless. Two things I would highlight, however. As you look at, you know, Mexico and Colombia, we continue to invest, and we will continue to invest in both of those countries as we have invested in Brazil. It has taken Brazil almost, you know, nine years, 10 years to get to today's profitability levels. We think that Mexico and Colombia will still take a few years, but we will be able to shorten that cycle there over the coming decade. As I mentioned in my opening remarks, Gustavo, we will not manage the company trying to optimize for, you know, next quarter or next two quarters or a week. We will optimize.

The results for the long-term, yet the business model in Brazil shows very kind of, vivid signs of profitability that we expect to continue to, showcase to analysts and investors as we evolve.

Gustavo Schroden (Senior Equity Research Analyst of LatAm Banks and NonBank Financials)

Great. Great. Thanks, Lago. Just a follow-up here, specific on the ROE that you mentioned, and specific on the investments that you mentioned in Mexico and Colombia. We could see that your capital location in Brazil is about $1.7 billion out of about $4.9 billion total consolidated. My question here, what's your expectations of a capital location in other countries, such as Mexico and Colombia, I would say in one or two years or maybe when you think that Mexico and Colombia will be at the same maturity of Brazil? I'm just trying to understand here the capital location because in my understanding it is important, especially when analyzing ROE. I'm just trying to get a sense here, your capital location and, what would be the potential equity overall here or potential ROE on a consolidated base? Thank you.

Guilherme Lago (CFO)

No, absolutely. Let me try to provide some guidance, or not guidance. I'll provide some color on those questions. I would draw your attention to page, slide 35 of our presentation. There you can see our capital position. First and foremost, we do believe that our business plan in Brazil, Mexico, and Colombia is fully funded. We have plenty of capital, plenty of liquidity to support the growth organic of Brazil, Mexico, and Colombia over the coming years. We do appreciate, however, that Mexico and Colombia can be more funding intensive than is in Brazil, especially because of the working capital cycle of credit card in those countries. And also because of how much interest earning is used in credit cards.

In Mexico and Colombia, the working capital cycle, I pay merchants in D+1, D+2, whereas I pay merchants in Brazil in D+27. The percentage of the credit card books that is allocated to interest earning portfolio there is higher than it is in Brazil. For those two reasons, it is more funding intensive for us to operate in those two countries. And we will have to develop very soon our deposit base in Mexico and Colombia. Eventually those will become countries in which they will also be more capital intensive with higher levels of return on assets there.

Gustavo Schroden (Senior Equity Research Analyst of LatAm Banks and NonBank Financials)

Great, Lago. Thanks. Very clear. Thanks a lot.

Operator (participant)

Our next question comes from the line of Marcelo Telles at Credit Suisse. Marcelo, your line is open. Okay, it seems that we are having problems with the line of Marcelo Telles, so let's move on to the next question. The next question comes from the line of Pedro Leduc at Itaú.

Pedro Leduc (Equity Research Analyst of Brazil Financials)

Thanks so much, Jörg, Lago, Vélez, for the call. Good evening. I wanna get your thoughts a little bit on loan book growth and vis-a-vis, provisions, provision expenses, how you're seeing NPLs evolve, or this quarter ticked up a bit. Yeah, there's some seasonality here as well. Stage 3 formation is a bit high, coverage down. As I model 2023 here, I can definitely see the strength of NII, offsetting a slower loan book growth, even though some growth, yes. I struggle to see provision expenses coming down as % of the loan book this year or near term. Does that make sense? Again, thank you.

Youssef Lahrech (President and COO)

Yeah, Pedro, this is Youssef. Thank you for the question and good evening. Taking your question in parts. With respect to provision expense, I would point you to the appendix of our earnings presentation, page 48, I believe, that kind of breaks down the drivers of that. As in past quarters, it's driven predominantly by growth. You know, about 90% of it is driven by growth. When you look at the credit quality in NPL, beyond what I provided in the earlier remarks, I think it's important to kind of distinguish the dynamic of NPL 15-90, the early indicator, short-term delinquencies from 90+. 15-90 decreased sequentially. That's, you know, very much in line with seasonal patterns.

90+ increased because 90+ tends to behave as a stock metric, right? It accumulates for credit cards all the way up to a year after entering delinquency buckets. We've seen kind of behavior on these two metrics pretty much following expectations. You know, going forward, it's hard, you know, for me to give you very precise guidance, given that the pattern of delinquencies will depend on several factors. Part of that is the quantity and mix of our own originations. Part of that is more macro drivers. You know, what I can tell you is from a seasonal perspective, we expect as usual Q1 to be a seasonal peak in delinquencies following the trough in Q4, and then Q2, Q3 tend to be more normal. That's, you know, that's what I expect the seasonal pattern to look like.

Pedro Leduc (Equity Research Analyst of Brazil Financials)

Thank you. Sorry, if I may follow up the outlook for provision expenses vis-a-vis loan book growth on a relative basis for 2023, expect it coming down gradually as the year goes. How are you guys seeing that?

Youssef Lahrech (President and COO)

Yeah, Pedro, I expect what we've seen in past quarters and in Q4 to continue, which is, you know, provision expense will primarily be driven by the growth in the book. The bulk of it, as you've seen on page 48, is driving that growth. Again, it's the quality of the growth but also the mix. There's slightly different dynamics between credit cards, unsecured lending. When we introduce secured lending, it will change the mix a little bit as well over time.

Pedro Leduc (Equity Research Analyst of Brazil Financials)

Okay. Thank you.

Operator (participant)

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

Thiago Batista (Executive Director and Head of Research in Brazil)

Hi, guys. Congratulations on the results. I have a question about the amazing 40% ROE that you provided for the Brazilian operations. If or do you know what would be the profitability if the central bank's rules regarding capital were already implemented? What would be the ROE with, let's say, the fully loaded of the capital requirements in Brazil? As a follow-up, if the payroll loan business should be diluted or not for the most ROE.

Guilherme Lago (CFO)

Thiago, this is Lago. Good evening. Thanks so much for your question. The ROE numbers should not change much in the new regulation, because as of the end of 2022, we were already operating at a all-in Basel, already looking at the conglomerate between 9% and 10%. It should be, this should increase gradually from 2023 throughout 2025, but we are not operating with a much lower capital base than other financial institutions would have been had they opted for the prior regulation. We can certainly work with you after the call on trying to fine-tuning from 9.5%-10.5%, but it should directionally not change much the levels of returns that we are getting as of today, largely because we are massively overcapitalized in Brazil.

If you take a look at our financial statements in the very last page, you're gonna see that the capital ratios of our financial institutions is above 20%. The capital ratios of our payment institutions above 20% as well. I think that's the my attempt to address your first question. On your second question, no, I don't think that the payroll loans should be dilutive to our overall ROE. We are assuming that we're gonna have levels of return on equity and returns on tangible equity that are in line or higher with the return on equity that we posted in the fourth quarter of 2022. I'm not sure if I understood your question very well to differentiate those two things.

Thiago Batista (Executive Director and Head of Research in Brazil)

Very clear, Lago. No, no need. Thank you a lot.

Operator (participant)

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

Neha Agarwala (SVP)

Hi. Congratulations on the results. Thank you for taking my question. I'd like to talk about asset quality a bit. Could you give us a sense of what would be the asset quality NPL ratio 90-day with the older methodology, if that's possible? We've seen the early delinquencies come down during this quarter, which is a good sign. Does this mean you're feeling a bit more comfortable regarding asset quality, or are there pockets of vulnerability that you continue to remain cautious about? How do you see that impacting originations in the coming quarter? In 2022, you were very clear that you would probably like to maintain originations at the level of $5 billion every quarter. Should we expect that to be accelerated during 2023? What do you see the risks regarding that acceleration?

Youssef Lahrech (President and COO)

Yeah. Hi, Neha. Good evening. Thanks for the question. Let me address first your question on the impact of the write-off methodology change we did at the end of the second quarter of last year on NPLs. As we've reported in past quarters, you should think about the impact on 90+ NPL as a reduction of 200-220 basis points in the quarter. It's pretty consistent with past quarters on that. Now, with respect to NPL trends, as you correctly pointed out, there's been sequential improvement in 15-90. You know, some of that was seasonality, some of that was the improvements we drove throughout the year in our underwriting stance, particularly with respect to personal loans.

As we mentioned in past quarters, we took a bit more of a cautious stance, given the uncertainty throughout the year, and we've seen very positive results from that, both in terms of the repricing we've done on the top line as well as NPLs. All in all, we feel pretty good about what we're seeing from a risk-return standpoint. That drove the sequential increase in originations, as Lago pointed out, of around 10% in personal loans itself. We're pretty encouraged by these trends. You know, again, it's hard for me to give you very precise guidance on a going-forward basis. We're, you know, so far we're kind of comforted by what we're seeing on this.

Neha Agarwala (SVP)

Sorry, I did not get the 90 day NPL ratio under the old methodology, what would the number be approximately? Do we have that?

Youssef Lahrech (President and COO)

Yeah, yeah. Just to refresh on how the new methodology works. It affects, you know, primarily personal loans, whereby, you know, the timing of write-off moves from 360 days to 120 days. This is per IFRS principles on expectation of recovery. When you're moving the timing of write-offs, you're basically moving whatever was from 120 days to the 360 days of delinquency to write off. That tends to decrease 90+ NPLs. As I indicated, that decreases around 220 basis points of decrease between moving from the old to the new methodology. That's been consistent across quarters since we made that change. I don't know if that was clear.

Neha Agarwala (SVP)

Okay. Okay, okay, yeah. I just wanted to confirm about the 220 basis points difference. That's perfectly okay. Regarding asset quality, if you could just elaborate. At this point, like, it seems like things are getting better. Even early delinquencies are coming down. What worries you regarding asset quality? Is there any particular exposure that worries you, or are you just cautious about the macro and trying to take it slow, keeping an eye on asset quality?

Youssef Lahrech (President and COO)

Yes. Yeah. On that, I mean, I think it's helpful to kind of take a step back and rewind the clock a little bit to where we've come from, you know, throughout the pandemic period. What we saw is starting in the second half of 2020, very low levels of delinquency, you know, abnormally low because, you know, consumers were saving money, there were government interventions, and so forth. For a bunch of reasons, we were in abnormally low delinquency territory, and it was very clear that the trend was gonna be normalization and a move upwards of delinquencies. I personally think that cycles largely played out and we're now in a new part of the cycle. It's a little bit more of the higher uncertainty part of the cycle.

For us, you know, the stance is to be cautious. We're not worried about particular pockets, but, you know, we're always prepared to adjust our underwriting based on anything we see in our monitoring. We've actually built our underwriting system to be able to iterate very dynamically, very quickly adjust, you know, if we see things play out different from our expectations in either direction. I would say in the last two quarters, and particularly in Q4, we've seen relative signs of stability, and we've seen NPLs come in fairly close to our actual expectations.

Neha Agarwala (SVP)

Perfect. Thank you so much.

Operator (participant)

Our next question comes from the line of Jamie Friedman at SIG.

Jamie Friedman (Senior FinTech and IT Services Research Analyst)

Hey, guys. Thank you, and let me echo the congratulations. I just wanted to follow up on some of the previous questions, including those from Neha. Lago, when you were walking through slides 18 to 20, I thought that the suggestion, I don't wanna exaggerate, was that there could be an acceleration in originations. I realize you don't give guidance. Everybody seems to be asking about the same thing. I guess, what is it maybe, Lago or Youssef, that would make you more confident in opening the credit box? 'Cause it seemed like in 2022, just to kinda revisit what happened, the box was opened, then it was closed, and it was reopened, then it was closed. Anyway, is this? Where are we in the Goldilocks? Is it? What would make you more confident in lending again? Thank you.

Guilherme Lago (CFO)

Jamie, thank you so much for the question. Let me try to address, and then I'll also invite Youssef to complement. I think there are a few aspects that he addressed in his response to Neha that would help us here as well. I think if you take a look at our, you know, presentation slide 18, you're gonna see that the growth that we have had is due to, you know, basically two tails, as I mentioned in my opening remarks. Number one is credit card. Credit card has grown over the past year at a clip of about almost 70% year-over-year, and we continue to see very strong support in its growth throughout, you know, the first quarter of 2023.

We believe that we're gonna have another strong year at 2023 as a whole. In personal loans, as you can go to slide 20 and, you know, referring to some of the comments that Youssef made earlier in the call, we were in fact a little bit cautious throughout 2022. We waited for a few quarters for delinquency to stabilize. We have seen delinquency stabilizing in the third quarter, but primarily in the fourth quarter. If you take a look in the fourth quarter, we have already started to accelerate the originations of personal loans. It went from about BRL 4.6 billion-BRL 5 billion, so, you know, more or less 10% growth.

All else constant, by which I mean if we continue to see, you know, losses and delinquencies playing out as per our expectations, you should expect to see ourselves, you know, growing a bit more the originations of personal loans throughout 2023. In 2023, you should also expect to see our launching secure personal loans, mostly public payroll loans, which should be an additional growth engine for our loan book throughout 2023 and 2024. Youssef, I'm not sure if you have anything to add to Jamie's questions.

Youssef Lahrech (President and COO)

Jamie, just to add two things to that in terms of how we think about the credit box and, you know, tightening or loosening. I mean, we operate always working backwards from booking every loan, every credit grant to be NPV positive throughout the life of the loan and to pass, you know, fairly strict, fairly conservative resilience requirements. Typically, we want every cohort of customers to be able to sustain a doubling of risk and still be above hurdle returns. That's what we work backwards from, and we kind of observed in our monitoring, you know, the latest behavior of our latest cohorts and kind of adjust accordingly. It's unusual that we make very big wholesale changes to our underwriting scorecard at any given point in time.

It tends to be much more dynamic, much more gradual, much more tweaking around the edges, unless there are extraordinary events. I think you're seeing a little bit of that in the fourth quarter with the increase in personal loan volume. Again, if performance continues to come in per our expectations, that trend should continue. The other thing to think about is beyond, you know, tightening, loosening the credit box, what impacts our underwriting or our origination volumes is, you know, the quantity of customers we have available to us to underwrite, and in particular, the quantity of customers for whom we have a lot of data.

If they're already, you know, PBA customers, primary banking account customers, you know, that gives us a lot more confidence and a lot more certainty in terms of being able to underwrite them for credit card, for higher limits or for personal loans.

Jamie Friedman (Senior FinTech and IT Services Research Analyst)

Thank you, sir. 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. Good evening. thank you for squeezing me in. I actually wanted to ask a question on your 2023 priorities. Specifically, it was very helpful to hear, I think, David, in the beginning of the call, you kind of called out a couple, I think, strategic areas that you're looking to focus on in 2023, including secured loans, affluent segment, obviously Mexico and Colombia. I wanted to ask from a product angle, so new product launches or maybe the products that are early in their development that you're focusing on for 2023, what's the top, you know, two, three products there that we really should be watching this year?

Jag Duggal (Chief Product Officer)

Hi, good evening. This is Jag Duggal. I'm the Chief Product Officer at Nubank. Let me take a swing at your question and complement what David said and reinforce some elements of it. There are a series of launches that we are really happy with that either recently happened or are pending. First, I'll reinforce a couple that both David and Lago have mentioned. We are excited at Nubank year by year to go after the largest profit pools in the markets that we operate. We started with credit card and moved over the last couple of years into unsecured lending, and now we're excited to move into secured lending, which is the third largest profit pool in the country, starting with a big focus on loans secured via public payroll.

We also have investment-backed loans, which we've recently launched, and looking to build out our secured loan portfolio. Just reinforcing that point. You also mentioned, and David mentioned, the focus on building up a deposit base in Mexico and ultimately in Colombia as well by opening up our bank account product, our Cuenta Nu, in both of those countries this year. That'll be important in its own right as part of broadening our product offering for our customers and also to help drive funding for credit as those markets evolve. A few other products that I will mention.

First, one that we launched a little while ago, but is now getting to the point where we're starting to make it available to more customers is our credit card product for small businesses, our Peixoto credit card product, which again, allows us to, A, address the credit card market, but B, also, broaden our offering for small businesses and build out the other side of our network. The other product that I would mention to you is a product we just announced publicly, I think it was yesterday, which is auto insurance. Again, it's just an example of us rounding out our product portfolio, particularly for customers who are in the middle and upper parts of the income spectrum. That stands out.

We're also continuing to work on scaling up our Money Boxes, which we've talked a lot about, and our Ultravioleta upmarket credit card, which is showing a lot of promise in the last several months. Those are a few of the things that I would highlight for you.

Eugene Simuni (Managing Director and Lead FinTech Analyst)

Got it. Very helpful. Thank you. I'll leave it there.

Operator (participant)

Our next question comes from the line of Alexander Markgraff at KeyBanc.

Alexander Markgraff (VP of Equity Research)

Hey, everyone. Thanks for taking my question. Maybe first, just on the credit portfolio, I wanted to ask just on slide 19, the 12% receivables mix of installments, obviously kind of above market. Just curious as to where you're comfortable or kind of targeting that 12% to trend in the near term and long term.

Youssef Lahrech (President and COO)

Yeah. Hi there. On the growth in interest earning receivables and credit cards. This was the product of us, you know, basically launching a number of new features for customers to be able to finance purchases, to finance payments, whether they be barcode payments and fixed payments, which is one of the latest features we've added. And we've seen a lot of success and strong adoption, really strong behavior from those features.

It wasn't really that we were working backwards from a particular number, but really, seeing strong customer adoption of these features, and very strong unit economics, from those. You know, going forward, you know, we're continuing to test and introduce new features. Hard for me, again, to give you specific guidance on where that number is gonna land, but we've been pretty happy with the customer adoption, the performance of those features we've introduced on credit card financing.

Alexander Markgraff (VP of Equity Research)

Okay. That's helpful. Then maybe just one more kind of macro-related questions? Just some kind of help or commentary on how you're thinking about potential TPV tailwinds and headwinds for 2023. You know, not looking for guidance, but just more generally speaking, how should we think about some of the puts and takes for 2023 on TPV?

Guilherme Lago (CFO)

Look, I think if you look historically on TPV, over the last, you know, three years, the market has grown at, you know, 30%-35% per year. Part of that was basically a recovery of the TPV pre-COVID. I think now we are getting to a point in time in which market expects the aggregate TPV of the market to grow at anywhere close to low double-digit rates for 2023/2024. That should not be the growth rates that one should expect from our cards business. We should expect from our cards business to grow materially higher than that, as we expect to continue to gain market share in both credit cards as well as prepaid/debit cards. We have been gaining market share over the past two years at a pace of about 150-250 basis points per year. We should expect to continue gaining market share strongly over 2023 and 2024.

Alexander Markgraff (VP of Equity Research)

Great. Thank you.

Jörg Friedemann (Investor Relations Officer)

Thank you. Thank you, Lago. Thank you, everyone. This concludes today's call on behalf of Nu Holdings and of our Investor Relations team. I want to thank you very much for your time, participation in our earnings call today. We're very excited to continue growing and strengthening our position in Brazil, Mexico and Colombia. Over the coming days, we will be following up with the questions received by our platform. Please do not hesitate to reach out to our team if you want to make any further questions. Thank you, have all a good night.

Operator (participant)

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