Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Nu Holdings Ltd (NU, Financial) achieved a significant milestone by reaching 105 million customers, a 60% increase from two years ago.
- Revenue surged to $2.8 billion, reflecting a 65% year-over-year increase, driven by successful cross-selling and upselling.
- Net income saw substantial growth, reaching $487 million, resulting in a record annualized return on equity of 28%.
- Adjusted net income hit $563 million, with a sequential expansion of 36% quarter over quarter and 131% year over year.
- The company maintained a low cost to serve, achieving a cost to serve per active customer of $0.90, showcasing strong operating leverage.
Negative Points
- LatAm currencies depreciated against the US dollar during the quarter, impacting financial results.
- Monthly ARPAC contracted to $11.2 this quarter compared to $11.4 last quarter, although it grew 6% on an FX-neutral basis.
- The 90-plus NPL ratio increased to 7%, reflecting higher delinquency rates due to strategic credit expansions.
- Despite strong growth, the lending portfolio's nominal dollar value contracted, indicating potential challenges in maintaining growth momentum.
- The company faces ongoing challenges in integrating new collateral agreements and launching new features for secured lending products.
Q & A Highlights
Q: Can you provide some color on how the payroll loan, particularly, is trending now that you have all of the features that consumers look for mainly the top-up? What's the acceptance level that you're seeing with your consumers? What is it reaction from competitors? Are you taking share or is it growth coming from new customers?
A: We are super pleased with the performance of our secured lending products, which includes public payroll loans and FGTS. We are still in the early stages, currently operating with two collateral agreements (INSS and SIAPE), which account for approximately 50% of our target market in Brazil. We have signed six additional agreements and expect to expand our target market to around 70-75% by the end of the year. We also plan to launch new features such as refinancing and top-ups, which are crucial for growth. Our structural cost advantages, including digital origination and no customer acquisition costs, position us well in this segment.
Q: I would like to pick your brains a little bit on the provision expense side for bad credit. We have seen it increase a lot during 1Q, and now in the second quarter, it is flattish on an FX-neutral basis. Can you provide more insights on this?
A: We provision based on expected credit losses (ECL) per IFRS 9. The slight contraction in CLA from Q1 to Q2 is due to better-than-expected early delinquency performance and relatively slower growth in Q2 compared to Q1. Our coverage ratios on both total loans and 90-plus loans have remained stable, indicating that our credit quality is in line with expectations.
Q: Your originations went up, but provisions are going down. Does this mean you expect lower losses on these new originations?
A: The ECL increased by about $300 million, with $400 million attributed to growth and $110 million to better-than-expected early delinquency performance. We continue to grow our ECL line item, reflecting our ongoing credit expansion strategy.
Q: What are your expectations for NPLs going forward?
A: We expect NPLs to continue increasing as we grow our credit book, particularly in personal loans and credit cards. However, our strategy focuses on optimizing the net present value (NPV) of customer relationships over their lifetime, rather than minimizing short-term NPLs. We see significant opportunities to grow market share in Brazil, where our penetration in loans and secured loans is still in the single digits.
Q: The message here feels almost one of moving down market, taking on more risk. What is the thinking on the shift up market?
A: We are not deviating from our intention to grow in the high-income market. We have made significant inroads in acquiring high-income customers over the past two years. Our brand awareness and consideration have improved, and high-income customers now account for a significant share of our purchase volume. We continue to see opportunities to increase our share of wallet within this segment.
Q: Should we expect stabilization in the interest-earning assets for credit cards?
A: While we are pleased with the unit economics and customer adoption of our interest-earning assets, we believe the adoption curve has been steep. We expect the growth rate to stabilize, although the overall percentage may still increase.
Q: Can you provide an update on open banking and its potential impact on Nu Holdings?
A: Open banking is a significant regulatory development in Brazil, offering opportunities to lower barriers for data exchange and asset movement. We have a market share of about one-third of all consents in Brazil, translating into better customer segmentation and credit underwriting. We expect further developments in the next 6-18 months, including the exchange of assets and liabilities, which could be transformational for the Brazilian banking sector.
Q: Do you see any material change if Nu Holdings were to be considered an S-1 instead of an S-3?
A: We don't see a need to acquire or apply for a banking license in Brazil at this time. Our current licenses allow us to offer all necessary services. If we were to pursue a banking license, the implications for regulatory capital and reporting requirements would be minimal. We expect to become an S-2 financial institution by mid-2025, with no significant impact on regulatory capital or compliance costs.
Q: How is the credit part of the deployment going in Mexico, and are you comfortable increasing your credit portfolio there?
A: We are very excited about the opportunities in Mexico. The $3.3 billion in deposits surpassed expectations, and we see significant potential to challenge conventional wisdom in the market. We have reaccelerated credit growth and are close to 8 million customers. Our credit quality indicators have improved, and we continue to see opportunities for growth. We have applied for a banking license and expect to receive it in the coming months.
Q: Can you break down your growth in credit card spending and loans between new customers and those switching from other banks?
A: In Brazil, most of our customers already have a banking relationship, and we focus on upgrading their credit limits. In Mexico, the main opportunity is financial inclusion, offering banking products to the unbanked or underbanked population. The credit card markets in Brazil and Mexico have different dynamics, but both offer compelling unit economics.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
