MercadoLibre Inc

BMV:MELIN

Earnings Call Transcript 2023-Q2

[Richard Cathcart, Investor Relations Officer]

Hello everyone and welcome to The MercadoLibre Earnings Conference Call for the quarter ended June 30, 2023. Thank you for joining us. I am Richard Cathcart, Investor Relations Officer at Mercado Libre. Today, we will share our quarterly highlights on video, after which we will begin our live Q&A session with our Chief Financial Officer, Pedro Arnt; and Fintech President, Osvaldo Gimenez; and Commerce EVP, Ariel Szarfztejn.

Before we go on to discuss our results of the second quarter of 2023, I remind you that management may make, and this presentation may contain, forward-looking statements, so please refer to the disclaimer on screen, which will also be available in our earnings materials on our investor relations website.

Before turning to our quarterly results, we would like to highlight that our new Investor Relations website is live and has new resources, such as videos, podcasts and frequently asked questions to help investors better understand our business. We have also improved navigation around the site, making it easier to find our earnings and SEC documents.

With that, let's begin with a summary of our results.

[Pedro Arnt, Chief Financial Officer]

Hello everyone. I'm pleased to share with you that Mercado Libre continues to sustain its strong momentum over the last few quarters. Q2 '23 was once again a very, very solid quarter. Rapid top-line growth and strong margin expansion were broad-based across geographies and business units, showing the strengths of our business and the potential of our financial model as we continue to scale.

Let me begin with the financial highlights. Our revenue growth remains high despite our size, and this, combined with operational efficiency and scale, led to a big step-up in our income from operations margin. Income from operations more than doubled year-on-year, reaching a new quarterly record.

This quarterly result is a testament to the potential for solid margin expansion combined with above market rates of growth inherent in our performance. In the short run, not every quarter will look like this, there are still multiple growth vectors for us to invest behind, but it certainly points to the long term margin and cash upside we believe we can deliver.

Turning to the KPIs of our commerce business. In Q2, Mercado Libre’s GMV surpassed the 10 billion mark for the first time. This growth was driven mainly by Brazil and Mexico, which overtook Argentina to become our second largest commerce geography for the first time. Brazil and Mexico both delivered an acceleration of successful items growth compared to the previous quarter. As we continue to bolster MercadoLibre’s value proposition, our leadership position in the region has been going from strength to strength.

Other highlights in commerce include fulfillment penetration in Brazil, which is accelerating, reaching a new high and also a further pickup in growth of our first party business, which grew well ahead of overall GMV during Q2. On top of that momentum, our Advertising business remained strong, with revenue reaching the equivalent of 1.6% of GMV, driven by higher engagement with Product Ads.

Mercado Pago’s TPV growth remained strong as well. The acquiring business delivered higher TPV per device, as our move up market to larger SMBs continues to deliver successful results in both Brazil and Mexico.

On the digital account front, TPV and engagement with our more complete product stack also improved, as the KPIs indicated. Insurtech and asset management, newer and smaller businesses, are also gaining traction as these products scale and we improve the experience and product offering to our consumers.

Turning to credit, NIMAL continues to expand on the back of healthy spreads in Mexico, a good performance from the credit card in Brazil and overall broadly stable delinquency. We are, once again, pleased to share MercadoLibre’s strong results with our shareholders. We will continue to develop our value proposition, investing aggressively, yet with discipline and always focusing on long-term value creation.

Just before we go into the Q&A, Richard will share some more detailed business news with you. Thank you, and I look forward to reporting back to you in a quarter.

[Richard Cathcart, Investor Relations Officer]

Today we want to share a more detailed view of our fintech operations in Mexico. For Mercado Pago, Mexico represents an exciting opportunity. It is a growing country, with a large population that currently has lower adoption of financial services than other markets in Latin America, such as Brazil.

Over the last few quarters, we have been rolling out our fintech product stack in Mexico, positioning MercadoPago as one of the leaders in the development of the market for digital payments and other financial services. Our strategy is to serve both payers and merchants, focusing on users that are already within our ecosystem. As we do this, we build on the trust of Mercado Libre’s brand, and build on the user relationships and knowledge from the commerce business to better serve our fintech users.

Mercado Pago users in Mexico can open their digital account within minutes, for free. The money stored in the account generates interest at the benchmark rate through a partner and can be used at any time with our free debit card, money transfers and online payments. To get money into the account, users can transfer from other banks or use our money-in solution at physical stores, an important feature in an economy where cash is still dominant.

Another important characteristic of the Mexican market is remittances, a service used by millions of Mexicans every month. For Mercado Pago, this represents an opportunity to encourage the digitalization of cash, with transfer directly into the digital account. Mercado Pago offers these transfers through partnerships with two established and renowned players, and recently launched a third partnership with an exciting startup, Felix Pago.

Our consumer credit solutions are popular in Mexico and continue to perform well with our buy now, pay later product having higher penetration on the marketplace than our other geographies. This highlights the synergies of our ecosystem, with marketplace knowledge helping the underwriting of credit. We also offer consumer loans, with money deposited into the users account to fulfill day to day financial needs. The consumer credit book has increased in size significantly in the last 12 months and continues to perform well, with strong profitability and stable NPLs.

In the first half of 2023, we launched our credit card in Mexico to complement our consumer credit offer. This is an important product for the development of the market in Mexico, as it drives engagement, principality and digitalization of cash. This product is still at small scale, but we expect it to be a key piece of the Pago value proposition in Mexico in the long-term.

On top of that, this year we have expanded our insurance solutions, another important product with low penetration in Mexico. Like in other geographies, we began by offering extended warranties for items bought on Mercado Libre, followed by insurance for life, cellphones, personal accidents and digital account cover, building a complete product stack for consumers’ core needs.

In Q2, we expanded the extended warranty product to cross-border purchases for the first time. In an underbanked country like Mexico, our strategy has been to serve and develop both sides of the market payers and merchants to drive market development. By bringing more consumers to digital finance, we also drive adoption among merchants in the country.

That is why Mercado Pago offers complete payment solution to these merchants, combined with the fastest payment settlement in the market and competitive receivables discount rates. During 2023, we increased our focus on our smart POS in Mexico, aimed at larger merchants that generate higher TPV. Merchants also have access to online payment tools and are able to offer payments in installments to their buyers.

On top of these products, merchants can access credit lines through Mercado Pago, many for the first time ever, to grow and develop their businesses. Mexico is a market that is still at an early stage of development, but presents sizable opportunities for Mercado Pago and Mercado Libre. With a robust product offer, we firmly believe in the potential of our value proposition to Mexican individuals and merchants and we will continue to work to tailor our services to their needs.

As always, the best is yet to come.

[Operator]

Thank you. We will now conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Irma Sgarz of Goldman Sachs. Please proceed with your question.

[Irma Sgarz, Goldman Sachs]

In your remarks, you state that you intend to use some of the headroom created by operating leverage to lean into certain areas of the business in the second half of this year. Can you just lay out for us which areas are a priority for the short and immediate near-term? And I would imagine that credit cards in 1P as you've previously noted are a top priorities here. But I'm curious where you are at regarding the lower value items or those items below the free shipping threshold. Specifically in light of the ongoing cross-border discussion and somewhat related to this in Mexico, you have a more sizable cross-border operation compared to other markets. Is this an operation that is margin accretive overall or for the Mexican market? And if so can the same model be applied in Brazil?

[Pedro Arnt, Chief Financial Officer]

So in general, we continue to see multiple opportunities for us to invest behind our users and growth. We've been extremely pleased with the market share gains we've been delivering across the Board over the last few quarters. And so it's important for us that we continue to carry out that balancing act between short-term margin expansion and long-term scale and overall size of the business.

So I'm not skirting the answer, but it really is, there are multiple growth vectors and multiple areas that we can choose to lean into in quarters where we feel where we're coming in very strong on bottom-line and have opportunity to accelerate growth even more. You've mentioned some of them, but there are multiple others. We've recently launched a new loyalty program. We continue to invest heavily in technology for our advertising business.

And really there are multiple vectors of growth and that's what we're trying to continue to be very consistent on, which is taking a long-term view and trying to capture as many opportunities as we can and continuing to maximize market share while delivering operational leverage over longer periods of time.

The CBT business in Mexico is performing very well. I think it's a very good example of how when we focus on cross-border trade and we build out the product. We can deliver strong results cross-border GMV in Mexico has been growing at about 2X the growth of non-cross border GMV, and it is a profitable business.

[Operator]

Our next question comes from the line of Bob Ford of Bank of America. Please proceed with your question.

[Bob Ford, Bank of America]

Pedro, can you talk about advertising and the operating leverage in Mexico specifically? There were some big gains there, and in the context of building that credit book, we thought the performance was all the more impressive.

And in the last week, you've changed the landing page for the cross-border business in Brazil. You've added new categories and have gotten up to about 4.2 million listings. How are you thinking about cross-border and the relevance of the value proposition following Remessa Conforme? And how long will the Remessa Conforme compliance certification process take in your view?

And then lastly, can you talk a little bit about Mercado Libre? How many titles are you launching with, how do the economics of the model work? And what have the initial changes in engagement been so far from the users in the early stages, both in terms of the marketplace as well as Mercado Pago? Thank you.

[Ariel Szarfztejn, Commerce EVP]

Hi, Bob, this is Ariel here. Let me start with cross border in Brazil, which have been generating some discussions in the last few weeks. So, we've been competing against Asian players in Brazil for several years now. And moreover, the old scheme, and it's the way it's implemented, created some loopholes for companies who were supposedly importing B2C items at the zero import tax rate in the country. So, the way we think about it is that if anything, the new scheme will actually increase taxes for everyone.

I guess time will tell if the speeds improvements, that will be generated with the new model will actually increase demand or not, but we still think that the best case scenarios in terms of lead times will still be far from our same day and next day value proposition that we're currently offering in Brazil, but simultaneously the new scheme presents new opportunity for Mercado Libre as well our CBT business in the country is almost nonexistent.

So we think that we can actually build and scale a robust cross-border business, taking advantage of our own strengths, such as our traffic, the trust in our brands, our payments infrastructure, our local logistics, etc, etc. As Pedro was saying before, our cross-border business in Mexico is growing twice as much as our website, but if you look at what we are doing in cross-border in Chile and Colombia, where we also put some focus is growing triple digits in each of those countries.

So, we think we could build something around cross-border with the new scheme. We'll probably be putting some effort in there whenever our resources allow us to do so. And that's the way I guess it will play out. Regarding Mercado Libre, I think it's too early, we are just deploying our first version of the products, increasing the catalog. So not much to be sell on that one, not many numbers to share either. I guess Pedro, you want to take leverage in Mexico?

[Pedro Arnt, Chief Financial Officer]

Yes. So, the Mexican expansion in margin and this applies to Brazil as well, Brazil and Mexico both drove the lion's share of the growth in EBIT and margin expansion. And it's been remarkably consistent across multiple products, both in commerce and fintech. So with the exception of the 1P margin that contracted slightly, pretty much all other revenue streams are coming in with very solid cost management and strong growth in revenue. So, this wasn't driven solely by credit in Mexico nor in Brazil. I mean, I think that's important to point out.

[Bob Ford, Bank of America]

I just one follow-up if I could, and that is Ariel, how long do you think the Remessa Conforme compliance and certification process is going to take?

[Ariel Szarfztejn, Commerce EVP]

I think it depends more on the government than on ourselves. So, it's hard to answer that question. We are ready and eager to engage in such a scheme. We think that, as I was saying before that, this could present an opportunity for us, but timing from a government perspective to adjust processes customs, et cetera, et cetera. It's hard to predict.

[Bob Ford, Bank of America]

Understood. Thank you so much.

[Pedro Arnt, Chief Financial Officer]

Bob, what we think here. Just one more thing. I think it's important. You asked on the model around play, the financial model. I think it's important to point out that, the upfront outlay on content is extremely controlled. Most of the contracts are structured primarily with a revenue share. Remember, this is an advertising video on demand platform. And so, we really are trying to build out solid technology product learn, but the outlays in terms of commitments on content are efficiently managed, and most of the economic model will work around rev share with the content owners.

[Bob Ford, Bank of America]

Super helpful. Thank you so much, Pedro.

[Operator]

[Operator Instructions] Our next question comes from the line of Andrew Ruben of Morgan Stanley. Your line is now open.

[Andrew Ruben, Morgan Stanley]

Hi, thanks for the question, a couple of items on logistics here. We saw the 40 basis point increase in Brazil fulfillment penetration. Curious what drove the step change and what the bottlenecks are for increasing that figure further? And then when looking at the quarter, we see about an 80 basis point increase for shipping fees within the take rate. Curious what's driving that? How you are thinking about the fee structure? Thank you.

[Pedro Arnt, Chief Financial Officer]

So, regarding the first one on fulfillment, I see stronger demand from sellers in trying to engage with our fulfillment program. I think we have also improved our technology and product to streamline new cellular onboarding plus existing seller farming. So, we have the technology and tools to tell the sellers exactly what we think will sell in fulfillment and to help them to drive more inventory into our warehouses. So, the combination of the two is probably the key explanation behind the increase in fulfillment penetration. That was the first part.

The second one, Andrew, can you remind me?

[Andrew Ruben, Morgan Stanley]

Yes, just around the impact in the quarter, we are seeing, the increase in shipping fees. Curious what's driving it? Thank you.

[Pedro Arnt, Chief Financial Officer]

Sure. When you look at market shipping take rate, you should bear in mind that, that's a combination of two things. On the one hand, it's how much we charge our buyers and sellers for logistics services, but on the other hand, you have contract costs, including their mainly distribution costs. So the 70 basis points improvement that you see in shipping take rates are a combination of both.

So we have always been disciplined and explicit in saying that we will try to trust pass the logistics inflation to our buyers or sellers, whenever it makes sense. And on the second hand, we have been also very effective in trying to get productivity improvements from our distribution operation as well. So the combination of the two is basically we are explaining the 70 basis points that you see in there.

[Operator]

[Operator Instructions] Our next question comes from the line of Marcelo Santos of JPMorgan. Please proceed with your question.

[Marcelo Santos, JPMorgan]

Hi. Good evening to all. Thanks for taking my questions. I have two. The first I wanted to ask about the Argentian peso exercise that you did the simulation that you put in the release. I wanted to understand, how you dealt with costs that might be denominated in pesos, but are effectively driven by U.S. dollar. For example, I don't know, I imagine developers probably, they earn money in pesos, but their salary somehow linked to the U.S. dollar. Did you just got the cost in peso whatever they were and converted and did the exercise or did you use some discretion to try to address this issue that maybe discussed will increase if there is a devaluation? That's the first question. And the second question is about the credit card in Brazil. Is this product already producing positive amount? Thank you.

[Ariel Szarfztejn, Commerce EVP]

Let me take the first one. I think first of all, important to note the spirit of the disclosure, and we can get into more detail if necessary, is to clarify that when quantifying the impact of a devaluation in Argentina, it's not as simple as linearly devaluing revenues and costs from Argentina, because there are also Argentine denominated costs that don't appear in the Argentine segment, but appear in the other segments because we export a lot of services from Argentina. And that obviously has a positive impact on margins in other country segments because the revenues there are not Argentine peso denominated.

Your question about Argentine peso denominated costs, but that could potentially have an underlying, tie to U.S. dollars. I think that that's a third derivative that the model doesn't take into account. But I would disagree that this is a linear pass through. Salaries in Argentina are in Argentine pesos. Obviously Argentina is a high inflationary country because of the consistent devaluation of its currency. But a devaluation probably actually generates a benefit in terms of IT costs at least in the midterm.

[Pedro Arnt, Chief Financial Officer]

With regards to the credit card in Brazil, I would say that as you recall, during the second half of last year, we were more conservative in, in terms of credits, given, the macro environment. And we made good use of that time to rebuild our business models and we are very happy with how they have been evolving and therefore, I would say. From the last quarter of last year until now, we nearly tripled. We more than triple the, the number of cards we issued in a given quarter. We are excited about the results we're seen. It's marginally the new cohorts are creative, but it's still very early on in the game and we need to continue to continue growing.

[Marcelo Santos, JPMorgan]

Marginally could you means that they're generating positive habits. Just want to understand if the contribution is positive or negative?

[Ariel Szarfztejn, Commerce EVP]

Let's say marginal contribution, the marginal contribution is positive of the last cohort we have issued here. Still this is a small number.

[Operator]

One moment for our next question. Our next question comes from the line of Deepak Mathivanan of Wolfe Research. Please proceed with your question.

[Unidentified Analyst]

This is Zach on for Deepak. Just to follow up on the last line question, just, follow in and specifically on the Argentina macro, obviously it's very challenging. The unit growth is holding up relatively well, just de accelerated slightly. But just curious about how you're thinking about kind of going forward, the investments specifically in this country, in this area and how to think about kind of staffing levels? Is this an area where you're thinking you're reevaluating kind of the investment and staffing levels currently? Or are you kind of happy with where things stand? And then also just touching base on the inflationary trends, specifically on the logistics side in Brazil, kind of noted that you're passing through some of these costs onto consumers. Is that inflation pressured primarily on the labor or the partner side or both perhaps? And how do we think about the kind of pace of inflation kind of into the back half of the year? Is it accelerating decelerating or is it kind of relatively stable? And kind of expect the kind of pass-throughs to kind of continue going forward? Thanks.

[Ariel Szarfztejn, Commerce EVP]

Let me take the last one first. I think you're better off asking a macro economist on inflationary expectations for the back half of the year. On Argentina, we continue to see tremendous potential in that market. If you look at what we've built in Pago, it's phenomenal. Our commerce position from a competitive position is extremely strong. And if anything, there is a greater possibility now than maybe two or three years ago that Argentina midterm might course correct.

So, we're definitely not considering anything like scaling down our commitment to the country or pulling out. If anything, we have a sense that that might be one of the areas where we can lean into it a little bit more in the back half of the year and accelerate unit growth even more. I think unit growth, if you compare to historical levels in Argentina has actually been anemic. Mexico, Brazil, Chile have been outperforming Argentina, so there might be an opportunity there to re-accelerate unit growth on the commerce side, on the fintech side, it's been absolutely firing on all cylinders.

[Pedro Arnt, Chief Financial Officer]

Regarding the first part of your second question, I would say inflation is coming from both. It's on the one hand coming from salaries, from operations, but it's also diesel and its usual inflation. So typically across every country in LATAM, we see logistics inflation being higher than average inflation in the country. And that has been the case in the past, half of the year, I'd say.

[Operator]

Please standby for our next question. Our next question comes from the line of Stephen Ju of Credit Suisse. Your line is now open.

[Stephen Ju, Credit Suisse]

So, it's really nice to see this meaningful jump in your first party GMB here even on a sequential basis. So, can you talk about the halo effect that you may hopefully be seeing in terms of the shopping behavior in the consumer? And secondarily, I mean, today it's consumer electronics, but where else can you look to plug some of the assortment gaps that you might have right now? And, if you can also talk about how has your thinking evolved in terms of greater or lower willingness to expand this business given the competitive environment? Thank you.

[Ariel Szarfztejn, Commerce EVP]

Hey, Stephen, Ariel here. So yes, we definitely see this acceleration as a consequence of all the investments that we have been putting into the business for several years. So our logistics improvement, the user experience and our investments and technology, the assortment and selection expansion, our retail business, our efforts to assure ensure price competitiveness.

So I guess, all the levels combined are driving user behavior and more transactions in our platform, which linked to the brand performance and the way we think our customers love Mercado Libre are definitely generating the numbers that you see. In terms of assortment experience, I guess, we will continue to trying to build the biggest available selection in the market. That's part of our essence and we will continue doing so in the near future. Thank you.

[Operator]

One moment for our next question. Our next question comes from the line of Maria Clara Infantozzi of Itau BBA. Please proceed with your question.

[Maria Clara Infantozzi, Itau BBA]

Hello, everyone. Thanks for taking my question. My question relates to the 1P operation. You showed consistent growth in this quarter, with is improving profitability trend, but also still dilutive to margins. So I'd like to try to please elaborate on more details about when should we expect an improvement with better contributions margins for the 1P operations? And also, if it's possible, it would be like to hear your perception about the competitive landscape here in Brazil and in Mexico? Thank you.

[Ariel Szarfztejn, Commerce EVP]

Okay. So on margin structure, 1P has actually been playing out very much in line, with the way we had anticipated in that as we gain scale, as we improve operational efficiencies and build out our organization, we actually see very significant margin improvement year-over-year and even sequentially. It's still not profitable, and that's a function of the fact that, it's still subscale versus some of our competitors.

And so, we need to continue to invest behind growing the business and the natural operational leverage will continue to kick in. When we can turn that business positive is probably not over the next few quarters. It's more of a mid-term objective of ours. But again, very pleased with the results this quarter, not only from a top-line perspective, but also how margins are improving as the business grows. On competition, I can hand it over to Arnt.

[Pedro Arnt, Chief Financial Officer]

So, I think Latin America has become one of the most intense competitive scenarios in the world probably. We have the big American player investing heavily in the region. We have Asian players who have local players to defend their position. So I guess we are all trying to serve the customers in different ways.

Actually, for us, I think our strategy has played well. If you were to look at third-party data, it seems that the case that we have been gaining market share, both in Mexico and in Brazil, even in this tough environment. So we hope to continue doing so, investing behind the business, and trying to make the maximum out of the investments that we have been putting together over the last few years.

[Operator]

One moment for our next question. Our next question comes from the line of Kaio Prato of UBS. Please proceed with your question.

[Kaio Prato, UBS]

Hello, everyone. Good evening. Thank you for the opportunity to ask questions. I have two on my side please. The first is on the net interest margin after losses of the business. So this quarter, you disclosed the NIMAL which included the funding cost and was interested to see that even including the funding cost and NIMAL remains high. So if you compare the first quarter, your NIMAL was like 31% while we're only looking to NIMAL, it was 37% since that your funding costs is not that high.

So just to like, to understand how you calculate these funding costs here, if you include own funding costs and take all funding costs or just one of them? And how could that flow leads and then I'll follow up with my question.

[Ariel Szarfztejn, Commerce EVP]

Sure, Kaio. So the funding cost is the blended average of the underlying cost on the credit book. So it's the cost of the physics and it's the cost of the debt that we take on to fund that and our equity participation.

[Kaio Prato, UBS]

So, this includes the third-party funding cost as well like and then the…

[Ariel Szarfztejn, Commerce EVP]

Yes, it includes the cost of third-party funding as well, indeed.

[Kaio Prato, UBS]

Okay and the second question, create of the fintech business we are. So excluding the credit business, uh, the takeaway had a reduction of more than 10 points quarter to quarter. So in our side you can see a part of related to final fees, but in a quarter of a quarter basis. We basically didn't see major change in interest rates. So just would like to understand what were the main drivers here, if this was related to lower prices as well, and what can we expect going forward, especially in light of the quality expected especially in the Q4?

[Ariel Szarfztejn, Commerce EVP]

So a couple of the key drivers on the compression of the fintech take rate there and they're fairly even distributed among these three drivers. So, there's compression on Argentine financing revenues. We've had less financed TPV as a percentage of overall revenues. And as the reference rates in Argentina have been going up, that's also tightened some of the profitability on Argentine financing.

In Argentina, the wallet business, which continues to perform incredibly well, but also saw some decrease intake rates through mix shift in the different monetizations on QR and the other transactional fees that we have in Argentina.

[Kaio Prato, UBS]

And then the MPOS business in Brazil also drove roughly also a third of the take rate compression in fintech. That's a primarily less devices sold as we move more and more up market into larger merchants. We have merchants with higher TPV per merchant, but obviously they purchase less machines. And so, the revenues on the sales of machines as net new machine sales. Decelerates is the third driver of compression on the fintech take rate. And like I said, roughly each one of these three drivers have a similar magnitude on the fintech compression.

[Ariel Szarfztejn, Commerce EVP]

And very in mind Kaio that for the last point Pedro mentioned, these machines are always sold at a loss. So lower revenues, but also lower cost.

[Operator]

[Operator Instructions] One moment for our next question. Our next question comes from the line of Geoffrey Elliott of Autonomous. Your line is now open.

[Geoffrey Elliott, Autonomous]

Could we talk a bit more about credit in Mexico, clearly at a very different market from Brazil in terms of the credit penetration of the consumer, the amount of existing credit relationships they're likely to have? How does that feed into the underwriting that you do? What opportunities does that create and what are the potential pitfalls of lending to people who've got less experience of taking credit before? Thank you.

[Pedro Arnt, Chief Financial Officer]

Hi, Geoffrey. So, definitely as you say, we see a huge opportunity in Mexico to start with, for our buy now pay later products within our platform. Mexico is the one country where we have by far the highest penetration. And beyond that overall in consumer originations, Mexico is already higher than the rest of the country. This stands for the first time ever, Mexico is higher than all other countries, for the first time ever, it's our largest consumer book for the third quarter in a row and continues to be the largest portfolio.

So, we are very excited overall with the opportunity. Our NPLs continue to be very good and continue to decrease. And what we see is an opportunity beyond our transaction on market leave and beyond consumer credit that's why we have got into credit card. We launched our credit card for friends and family earlier this year, and then we started to expand it. It's still very small, but we believe that we have a huge opportunity and that we can leverage our ecosystem, serve many of our users who supposed to other countries have in general less penetration of credit products. Some of them are not in current scoring worse, and therefore, we believe we have an opportunity to serve them very well.

[Geoffrey Elliott, Autonomous]

And any pitfalls with lending to people who just don't have as much of a credit history because credit's not been available to them before?

[Pedro Arnt, Chief Financial Officer]

We believe that it's our opportunity. As you know, our loans are typically very small to start with, and we have the information of transactions they have done on MercadoLibre. So I think that has been working very well since we started and we are to continue growing this.

[Operator]

One moment for next question. Our next question comes from the line of Marvin Fong of BTIG. Please proceed with your question.

[Marvin Fong, BTIG]

Two questions for me. So I think, it's just begun, and then Brazil is in the process of a debt renegotiation program. I think it's already released some encouraging statistics. My question is what's sort of your view about this program? Do you think it could unlock new opportunities for credit and extending credit to more people? And do you have any specific plans to target prospective borrowers, as this program evolves? And then second question, you mentioned, you are launched a new loyalty program. I was just curious, what are some of the new features of the program and can you share any metrics about how more productive people in the loyalty program are versus users that are not in the loyalty program?

[Ariel Szarfztejn, Commerce EVP]

Great. So on the Brazilian program to ease the burden of credit on consumers, I think, we began to see the first flow through to our own user base. It's probably early to tell, whether through open banking initiatives and other areas we will be able to target those users or not. In general, a conceptual answer is if it helps deleverage consumers in general, it probably generates a healthier consumer lending backdrop in a whole, but not too many deep insights to share with you at this point.

On loyalty, so, looking to announce changes to the program, simplified understanding of how the program works, continuous efforts to improve content that we can offer and to continue to sign more partnerships that give access to Mercado Libre loyalty users more and more benefits. We think that the fact that, we straddle both your financial life and your commercial life, gives us a unique opportunity to build a very differentiated loyalty program. We have some really strong content partnerships and content overlays that now have gotten complemented with MELI play.

And so we are continuing to focus on building out the loyalty program. The numbers of paid loyal users, so users who haven't necessarily been earning their way into the loyalty program, but are actually willing to pay for the program so that they can gain those benefits. It has been growing consistently quarter on quarter, which we think validates that we're building a very compelling user proposition and the data around the lift that we get in our users after they sign up for the program continues to be positive. We have shared some of those in previous calls.

So, stay tuned. You'll see a relaunch of the loyalty program soon, and it's a continuous effort to really turn that into a competitive advantage.

[Operator]

One moment for our next question. Our next question comes from the line of Neha Agarwala of HSBC. Please proceed with your question.

[Neha Agarwala, HSBC]

Hi. Thank you for taking my question. My first question is regarding the Brazil GMV growth which remains strong. It -- a bit, sequentially, but it can be to remain strong. So what are the main drivers behind that? Do you continue to see some market share gain after America now? Or in general, do you think your value proposition and the assortment is benefiting the GMV growth and helping you to gain market share? So that's my first question.

My second question is regarding the average yield of your loan book. If we do not consider the provisions, if you just see the yield on your loan book that went up from in my calculation, 73% in last quarter annualized to 76%. And this is despite the strong growth that we have seen in credit cards, which are dilutive to short-term interest income. What has led to this increase in the yield? Has there been some repricing or growth in more consumer loans that has led to this increase in yield, if you could elaborate a bit on that?

And my last question is on customer deposits. Have you are you already taking customer deposits in Brazil and Mexico, or what is the strategy there? Is that something that you think could, you would like to do in the future? Thank you so much.

[Ariel Szarfztejn, Commerce EVP]

Hey, Neha, Ariel here. So, today is MercadoLibre's 24th birthday and I'd like to think that the market share gains and the acceleration in growth that we are seeing in the business today is basically a consequence of everything we've been doing over this last 24 years. So, we think, and we like to think that we have the best value proposition and customer experience available in the market, and we'll continue putting our efforts behind building in the near future.

Great, happy birthday MercadoLibre It is 24 years since Marco started it in a garage, as everyone knows. On yields, two things, I think you're kind of hit on it. So we've continued to be fairly selective on who we're extending credit to. We haven't, um, expanded into higher risk segments, but we have slightly started to move into mid risk segments. We've also seen some upward pressures in terms of funding costs in some of our markets. And so that's also led to higher APRs. The combination of those yield improvements and significant improvements in bad debt is what has been driving the improvement in NIMAL on a sequential basis.

[Pedro Arnt, Chief Financial Officer]

And with regard to taking deposits, we do offer accounts which are remunerated in each of the three main markets in Brazil, in Mexico and Argentina. What we pay users is typically what we are able to get from those funds. So for example, in Brazil is close to CVI, which is close to 14% in Brazil is in Mexico, zero of 10%. And Argentina is at this point 80%. And this compares in many cases to savings accounts from banks, which pays zero.

And as a consequence of that, these deposit assets under management have been growing a lot in the last year. The growth for Brazil has been very high single digits, so, sorry, very high double digits. Not triple digit, but very high double digits in the case in Argentina is well into the triple digits part of that inflation. But even if you take inflation after the question, we have seen growth of 80% in terms of number of users using our creating accounts in Argentina.

And in and in Mexico, it's also a very good and very competitive product. I think we are paying the higher rates in the market, but it's still rather fairly new as compared to the one in Brazil or Argentina. So the volumes are not as high. But we do take deposits in all three countries for the volumes are not as high, but we do deposits in all country. If forma depending on what regulation permit in the case of Argentina, for example, and in the case of Mexico, many of those deposits are and then at the money market fund run by a third-party.

[Neha Agarwala, HSBC]

And how much of your loan book would you say is now backed by customer deposits roughly?

[Pedro Arnt, Chief Financial Officer]

The only country where we can use the deposit to back credits is in Brazil. And it's something that we do marginally and we do it marginally because we have this tragedy at this stage to grow, the assets under management and therefore we are passing through most of the, nearly all of the returns we get from those deposits. So it, I say at this stage is marginal, and only do it when we take CDBs, which is our equivalent of CDs in.

[Operator]

One moment for our next question. Our next question comes from the line of John Colantuoni of Jefferies. Please proceed with your question.

[Unidentified Analyst]

Hi, this is Chris on John. Thanks for taking a question. Can you give us some more color on how the credit book performs by region in the second quarter? And then in terms of your plans to expand it, are you still feeling most comfortable with expanding primarily in Mexico and Argentina, or have you seen any green shoots in Brazil that could get you more comfortable with expanding beyond the credit card product there? Thank you.

[Ariel Szarfztejn, Commerce EVP]

Hi, John. So I think that the credit books continues to perform very well across the board and we continue to see good NIMAL, which have improved. I think that we raise rates in expectation of higher default rates and these were lower.

So we have probably record highest NIMAL. And we have been able to grow the volume, as you mentioned both in Argentina and in Mexico. In Brazil, we are still below a year ago, which was probably our peak origination second quarter of last year. But we have been growing sequentially, our portfolio for the last several quarters and the fall rate continue to come down. So I think we are excited with the result and willing to continue growing the volume.

If you were to look at bad debt as a percentage of our portfolio, it has come down for last one, two, three, four, five quarters in a row. So since the second quarter of last year for last five quarters, we have been reducing the bad debt, in the last quarters, increasing the size of the portfolio. Although as I mentioned in the case of Brazil, it's still below what it was a year ago.

[Operator]

[Operator Instructions] I am showing no further questions at this time, so I would like to turn the conference back to Pedro Arnt, MercadoLibre's, Chief Financial Officer for closing remarks.

[Pedro Arnt, Chief Financial Officer]

Thanks everyone. Great start of the year. Phenomenal first half, continue to gain share, showing the power of our operational model and to top it all off 24 years of working, clearly paying off.

So thanks for the interest and we look forward to updating you in a quarter.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.