Q4 2023 Earnings Summary
- NU has significantly accelerated deposit growth in Mexico by increasing deposit remuneration to 15%, attracting higher-income customers and surpassing projections, which removes funding constraints and positions NU for significant growth in a market with only 12% credit card penetration.
- NU plans to expand its unsecured personal loan originations in Brazil by increasing eligibility to more customers, increasing average ticket size, and increasing loan duration, aiming to grow originations threefold and capture more than its current 7% to 8% market share in a market where NU's customers represent approximately 51% of the pool.
- NU is doubling down on investments in Mexico and Colombia, even at the expense of short-term profitability, to capitalize on significant growth opportunities in these less mature markets, which is expected to result in future revenue and profit growth.
- Decrease in eligible unsecured credit customers from 18 million in Q3 to 15.5 million in Q4, which may indicate tighter credit standards or reduced appetite for unsecured lending, potentially limiting growth in this segment.
- Additional investments in Mexico and Colombia are expected to increase expenses above the gross profit line, particularly impacting credit loss allowances and interest expenses, which may strain profitability and keep gross profit margins flat in 2024 despite growth in Brazil.
- High deposit rates offered in Mexico (15%) to attract customers could pressure margins, and the sustainability of these rates is uncertain. Dependence on continued engagement strategies to maintain the stickiness of deposits introduces risk if customers withdraw funds, potentially impacting funding and growth plans.
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Gross Margin Outlook
Q: Why will gross margins remain stable despite investments?
A: Lago explained that gross margins are expected to remain stable because the expanding net interest margins in Brazil will be offset by increased investments in Mexico and Colombia. These investments, primarily above the gross profit line in CLA and interest expenses, aim to double down resources in markets that are less mature. -
Mexico Strategy and High Deposit Rates
Q: Why offer 15% deposit rates in Mexico, and is it sustainable?
A: David Velez stated that offering a 15% deposit rate in Mexico helps reposition their deposit product, attracting higher-income customers and accelerating growth. This strategy is paying off quickly, improving customer segmentation and credit quality. While it's an investment, it's considered sustainable due to the positive unit economics and enhanced long-term profitability. -
Credit Quality and Provisions
Q: What are the trends in credit quality and provision expenses?
A: Youssef Lahrech noted that the $590 million provision expense in Q4 was favorably impacted by $60 million to $70 million in recoveries. Excluding these recoveries, provisions would have increased due to credit book growth. They expect this trend to continue as they expand the credit book, with potential increases in NPLs but anticipate higher returns and robust resilience. -
Capital Position and Outlook
Q: What's behind the increase in capital position to $5.4 billion?
A: Lago explained that the increase reflects the combined capital positions of Brazil and Mexico. They are comfortably capitalized, maintaining about 2x the minimum capital required in these markets, and nearly 3x when including $2.4 billion in excess capital at the holding company. They do not foresee the need to tap equity markets in the near future. -
Investments in High-Income Segment
Q: How will investments in the high-income segment affect efficiency?
A: Lago stated they do not expect material changes in efficiency trends due to investments targeting high-income clients. Investments are primarily in human resources and technology, aligning with their strategy to offer a holistic suite of solutions including credit cards, investments, and insurance. These efforts are within the context of maintaining strong operating efficiency. -
Regulation in Mexico
Q: Can Mexican regulators mimic Brazil's changes to boost financial inclusion?
A: David Velez believes the trend is positive. They are engaging with regulators who are increasingly aware of Brazil's success. Although progress is slower, there is goodwill to implement a free digital payment system, and they anticipate acceleration in regulatory changes that promote digital finance and competition. -
ROE and Reinvestment Strategy
Q: How much of ROE is being reinvested, and what's the outlook?
A: Lago mentioned that about 40% of operational headcount is in growth or moonshot businesses not yet generating full revenues. They are investing heavily for the long term, optimizing for sustained growth rather than short-term ROE maximization. They expect ROEs to expand further over time. -
Renegotiated Loans Impact
Q: What's the strategy regarding renegotiated loans and provisions?
A: Youssef Lahrech confirmed that the coverage ratio over renegotiated loans is around 40% to 45%, higher than the overall book due to their inherent risk. This mirrors the dynamics of the total loan portfolio, with coverage ratios increasing as loans become delinquent. -
Customer Growth in Mexico
Q: What's the profile of clients in Mexico, and how many credit cards are issued?
A: David Velez stated they have 5.2 million clients in Mexico, with an even 50%-50% split between banked and unbanked customers. The attractive deposit rate is drawing higher-income customers, improving credit quality and enabling higher credit limits. The exact number of credit cards issued was not disclosed. -
Unsecured Credit Eligibility
Q: Why did eligible unsecured credit customers drop from 18 million to 15.5 million?
A: Lago clarified that they are not becoming less optimistic about unsecured personal loans; the change reflects a different accounting of eligible customers. They plan to continue expanding originations by increasing eligibility, average ticket size, and loan duration, aiming to tap into a market where they currently hold 7% to 8% share.