Q2 2024 Earnings Summary
- Strong growth in secured lending products in Brazil, with secured lending originations reaching BRL 1.8 billion in Q2 2024, accounting for 14% of total lending originations. The company expects growth to accelerate in the coming quarters due to the introduction of new features like refinancing and top-ups, and the signing of six new collateral agreements, which will expand the eligible market from 50% to approximately 70%-75% by year-end. This positions NU to capture a larger share of the market with structural cost advantages.
- Rapid expansion in Mexico, where NU has attracted $3.3 billion in retail deposits in just over a year since launching their checking account product. The customer base has grown to nearly 8 million customers, positioning NU as one of the leading financial institutions in Mexico. The strong deposit growth exceeds their funding needs, providing opportunities for balance sheet optimization, and supports their application for a banking license, which is progressing as expected.
- Record-high risk-adjusted net interest margin (NIM) of 11%, representing a 300 basis point increase year-over-year. This was achieved through strategic credit expansion, optimizing net present value over the lifetime of customer relationships rather than minimizing short-term non-performing loans (NPLs). The additional revenue from this strategy has more than offset the additional credit risk, leading to substantially increased returns and demonstrating the effectiveness of their approach to credit growth.
- The expected stabilization of growth in high-margin interest-earning installments in credit cards could limit future net interest income expansion. Management indicated that the adoption curve for these products has been steep and is likely to stabilize, so they do not expect growth to continue at the same pace as before.
- The company's strategy of expanding its credit portfolio down the credit spectrum is expected to lead to increasing non-performing loans (NPLs) in future periods. Management acknowledged that they anticipate higher NPLs as a result of growth in riskier asset classes and customer segments, which could negatively impact financial performance.
- Non-performing loans have shown an acceleration in deterioration, with the 90-plus days NPL ratio increasing by 70 basis points this quarter, compared to previous quarters' increases of 20-30 basis points. This acceleration may indicate rising credit risk and potential challenges in managing asset quality.
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Asset Quality and NPL Outlook
Q: Why are provisions decreasing while originations and NPLs are increasing?
A: Provisions decreased this quarter despite higher originations because credit quality is performing better than expected, with early delinquencies improving ( ). Although NPLs increased by 70 basis points, this was due to seasonal factors, and we expect NPLs to continue rising as we expand credit, particularly in unsecured personal loans, but this is offset by higher returns ( , ). -
Growth in Lending and Returns
Q: Can risk-adjusted NIM continue to increase with loan growth?
A: We see continued opportunities to grow our loan book, which can further increase risk-adjusted NIM, though not indefinitely ( ). As we optimize our loan-to-deposit ratio, currently below 40%, towards levels above 100% like our peers, our net interest margins are expected to expand ( ). -
Mexico Expansion and Banking License
Q: How are credit and deposit growth evolving in Mexico?
A: In Mexico, we have $3.3 billion in deposits, surpassing expectations, and have reaccelerated credit growth with close to 8 million customers ( ). We applied for a banking license last year, and the process is progressing as expected ( ). -
Strategic Focus on High-Income Customers
Q: Are you shifting focus from high-income to higher-risk customers?
A: We remain committed to growing in the high-income segment, which is the fastest-growing in our purchase volume, with initiatives like Ultravioleta increasing over 70% in the past 12 months ( ). Our growth in lending doesn't indicate a deviation from this focus. -
Open Banking Developments in Brazil
Q: How will recent changes in open banking impact you?
A: We are very excited about open banking in Brazil, which can lower barriers for data exchange and asset portability ( ). We have about 50 million consents, approximately one-third of all consents in Brazil, enhancing our data for better customer segmentation and credit underwriting ( ). -
Balance Sheet Optimization
Q: Can you optimize the balance sheet further?
A: Yes, with our loan-to-deposit ratio below 40%, we have a gigantic opportunity to optimize towards levels above 100%, which should expand our net interest margins ( ). -
Credit Quality Outlook
Q: Is credit quality improving, and can you accelerate growth?
A: While credit quality has been relatively stable when excluding expansions, we don't rely on macro improvements and continue to demand resilience in our underwriting ( ). We see opportunities to grow without banking on credit quality improvements. -
Banking License Considerations in Brazil
Q: Will you obtain a banking license in Brazil?
A: Currently, we don't see a need to acquire a banking license in Brazil, as our existing licenses allow us to offer all necessary services ( ). If we eventually do, the impact on regulatory capital would be zero, with minimal additional compliance costs ( ). -
Competition and Market Position in Mexico
Q: How do you view competition from nontraditional players in Mexico?
A: We see a wide-open market in Mexico with significant opportunities. Our methodology allows us to dynamically manage credit risk, and we're optimistic about our competitive position despite competition from players like Mercado Libre ( ). -
Evolution of Credit Card Market
Q: Are you winning share from other banks or issuing first cards?
A: In Brazil, we mainly attract customers who already have banking relationships, helping them graduate to higher credit limits with us ( ). In Mexico, the opportunity is more about financial inclusion, offering credit cards to the 85% of the population who are unbanked or underbanked ( ).
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